Warren Buffett: How to Calculate the Instrinsic Value of a Stock
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- čas přidán 21. 01. 2022
- In this video Warren Buffett (CEO of Berkshire Hathaway) explains how to find the intrinsic value of a stock. The world famous value investor is a big believer in the discounted cash flow model, so we’re going to run through a full tutorial so you can start buying companies at margin of safety prices!
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DISCLAIMER:
Neither New Money or Brandon van der Kolk are financial advisers. The information provided in this video is for general information only and should not be taken as professional advice. There are risks involved with stock market investing and consumers should not act upon the content or information found here without first seeking advice from an accountant, financial planner, lawyer or other professional. Consumers should always research companies individually and define a strategy before making decisions. Brandon van der Kolk and New Money are not liable for any loss incurred, arising from the use of, or reliance on, the information provided by this video.
What are your methods of calculating intrinsic value? Lmk!
10x Net Income. It don't have to be any more complicated than that.
P/E
Same as your method. I also substitute EPS for cash flows and then use a future PE ratio as the mutliplier to get terminal value. Sticker price and margin of safety usually end up in the same range as when you use cash flows. Of course, intrinsic value is just one part of the equation. The other 3 criteria that Buffett uses are important as well: Know the business, is there a MOAT, how is management. It honestly takes hours of research just to find one company to put on the watchlist. But this method is superior to anything else I have done over the years.
@@sang3Eta 10x Net income? So, for example, for you, aapl should be valued around 940B?
DCF calculation
Taking early inspiration from Warren Buffett on the significance of solid asset diversification and risk management-it cannot be emphasised enough. I've been working on growing my $300K portfolio for some time now and would greatly appreciate any additional suggestions
Indeed, greater risks can lead to bigger rewards, and making such prudent decisions is best guided by professionals
That's wise. I've been in contact with an advis0r as well. With an initial reserve of $80k, my advis0r handles the entry and exit routines for my portfolio, which has now grown to around $550k
I've been considering a switch to a new financial mentor for some time. Would you be able to provide me with the contact information for your mentor ?
There are many independent advis0rs to consider, but I personally work with Stacey Lee Decker, who I find to be outstanding. If she meets your criteria, I wholeheartedly recommend her.
Thank you for sharing. After researching her online, I must say she has an impressive investing background. I plan to send her an email soon
I was advised to diversify my portfolio among several assets such as stocks and bonds since this can protect my portfolio for retirement. I'm seeking to invest $200K across markets but don't know where to start.
It's hard to beat the market as an ordinary investor. You don't have access to information that professionals have. So it's just better if you invest with a professional who knows how things work better.
With the help of an investing advis0r, I diversified my $400K port-folio across markets, and I was able to earn over $900k in net profit from high dividend yielding equities, ETFs, and bonds.
Please who is the consultant that assist you with your investment and if you don't mind, how do I get in touch with them?
My consultant is *Sharon Louise Count* She has since provide entry and exit points on the securities I focus on. You can look her up online if you care for supervision.
She appears to be well-educated and well-read. I ran an online search on her name and came across her website; thank you for sharing.
The market has been a turmoil since covid, the brief relief rallied for only a year and now the devastating effects of pumping trillions into the economy is here and will be for a while.
The stock market will go down further and goodluck on the fed pausing rate hikes w/ all the hawkishness that has failed to keep up with inflation.
The best course of action if you lack market knowledge is to ask a consultant or investing coach for guidance or assistance. Speaking with a consultant helped me stay afloat in the market and grow my portfolio to about 65% since January, even though I know it sounds obvious or generic. I believe that is the most effective way to enter the business at the moment.
please who is the consultant that assist you with your investment and if you don't mind, how do I get in touch with them?
There are a lot of independent advisors you might look into. But i work with Natalie Marie Tuttle and I have been working together for nearly four years, and she is excellent. You could proceed with her if she satisfies your discretion.
I just googled her and I'm really impressed with her credentials; I reached out to her since I need all the assistance I can get. I just scheduled a caII.
The stock market is a complex system that is influenced by a variety of factors, including economic indicators, political events, and global trends. The relationship between policies and the stock market can be complex and multifaceted, and it can take time for the full effects of policies to be reflected in market trends. Therefore, it is possible that policies implemented in the past may have a "lagged effect" on the stock market, as their full impact may not be felt until later on.
you're absolutely right, the stock market is a dynamic and constantly changing environment that can be influenced by a wide range of factors, including government policies. It is important to approach investing with a long-term perspective, also, understand the potential factors that contribute to your financial growth, I'll advise you to seek the help of a professional investment coach and to carefully consider the potential risks and rewards of any investment decision.
@@RebeccaBellick Thats true, I've been getting assisted by a FA for almost a year now, I started out with less than $200K and I'm just $19,000 short of half a million in profit.
@@AlexanderTurke I’ve been down a ton, I’m only holding on so I can recoup, I really need help, who is this investment-adviser that guides you?
@@ArthurLedgeeer My advisor is HEATHER ANN CHRISTENSEN she's highly qualified and experienced in the financial market. She has extensive knowledge of portfolio diversity and is considered an expert in the field. I recommend inquire her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
@@AlexanderTurke Thank you for this Pointer. It was easy to find her handler, She seems very proficient and flexible. I booked a call session with her.
I started buying some more stocks at the beginning of the year, but nothing big. Why am I treating this so harshly? I still want to be the first person in my polygamous family to make a million dollars despite the fact that others in my field make six figures per person. I am well aware of the costs associated with working more to get more money.
If the market has taught me anything, it's that it usually makes a comeback, but I can't seem to concentrate on the long term, especially because important things like my retirement and my reserve are having a disastrous impact on inflation. I need a solution and a data trajectory that I can trust as soon as it is practicable.
Currently, the best market strategy is to work with a credible investing coach. Since a while ago, I've been in touch with a coach, mostly because I lack the depth of understanding and mental toughness to deal with the ongoing market conditions. You lack the information necessary to succeed in a competitive market, not because you're doing anything wrong, but rather because of your lack of experience.
In fact, I'm not sure whether I'm permitted to say this, but I'd suggest searching for “ Laurel Dell Sroufe” as she gained a lot of attention in 2020. She is both my coach and the manager of my portfolio.
She has an impressive career and impressive qualifications, so I can understand why she is so busy. I thus quickly copied Laurel's full name and entered it into my browser.
Bot
I keep it simple just buy Berthshire stock and let Warren, Charlie and the boys do the work for me
Hows that going for ya
😁
@@hisheeelijah1482 Ask him when he started though
@@hisheeelijah1482 The price history of Berkshire is looking pretty good
How much should we pay for Berkshire?
Bought a good cross section of an economy, Built a diverse portfolio that i am attached to and keeps me motivated not following the crowd emotionally ,Sped up the process where possible:i use an FA, side hustle, reinvest, i do etf's, bonds, coins and stocks. After my first million I realized that when a stock starts booming chances of you finding out means you are quite late to the party, for this I make sure my CFA handles that, ever grateful to Helene Claire Johnson .it's like turning your notifications to earn more millions.
Found her webpage by looking up her name online.... she seems very proficient, I'll be writing a mail to her shortly
i’ve just taken a deep dive into investing, particularly dividend growth investment as it interests me. hoping to get to the big dogs someday..
I call BS on your post.
I appreciate your honest reporting. I admire you a lot for educating everyone. It all depends on the information and method applied. I've seen people earn significant 7-figure profits in sinking markets and pull it off just as easily in bull markets. There is no doubt that the crash/recession is making someone wealthy.
It is more difficult to create a solid investing portfolio, thus I advise hiring an investment advisor. You can then receive plans created to address your particular long- and short-term goals and financial aspirations.
@@sheliaswelttk2535 The uncertainties accompanying this present market is more reasons I have my daily investment decisions guided by an investment advisor seeing that their entire skillset is built around going long and short at the same time, both employing profit-oriented strategy and laying off risk as a hedge against the inevitable downtrends, coupled with the exclusive information/analysis, it's quite impossible not to outperform. Netted over $550k in return on investment, since using an advisor for about 2years.
@@williamskohler8337 I will need such tutelage. how is this going to work?
@@gabriellewilson5625 The advisor I employ is very well-known; you may have heard of her before. Her name is "Tracy Helene Aalvik," and you can look her up online by doing a search.
@@williamskohler8337 Thanks for the advice. The location of your counsel was simple. I did my research on her before we agreed on a session. Considering her resume, she appears knowledgeable.
Investing in the stock market has HISTORICALLY provided higher returns than other forms of investment. According to Morningstar, the average annual return for the S&P 500 index, which measures the performance of 500 large-cap stocks, was approximately 10% from 1926 to 2020.
Stocks are pretty unstable at the moment, but if you do the right math, you should be just fine. Bloomberg and other finance media have been recording cases of folks gaining over 250k just in a matter of weeks/couple months, so I think there are alot of wealth transfer in this downtime if you know where to look.
The best course of action if you lack market knowledge is to ask a consultant or investing coach for guidance or assistance. Speaking with a consultant helped me stay afloat in the market and grow my portfolio to about 65% since January, even though I know it sounds obvious or generic. I believe that is the most effective way to enter the business at the moment.
please who is the consultant that assist you with your investment and if you don't mind, how do I get in touch with them?
There are a lot of independent advisors you might look into. But i work with Catherine Morrison Evans and I have been working together for nearly four years, and she is excellent. You could proceed with her if she satisfies your discretion.
I just googled her and I'm really impressed with her credentials; I reached out to her since I need all the assistance I can get. I just scheduled a caII.
Charlie Munger said at the 1996 Berkshire Hathaway Annual Meeting: "Warren talks about these discounted cash flows. I've never seen him do one." "It's true," replied Buffett. "If (the value of a company) doesn't just scream out at you, it's too close."
Buffett does not do DCF calculations to find the intrinsic value- but he does use the concepts from DCF as they are fundamental to investing (similar to ROIC's relationship to NOPAT/AIC).
Great video though - I genuinely enjoyed it
One of the best videos on this topic! I had to hit the like button just a couple minutes in. You provide always clear, detailed, comprehensible information. Thank you so much!
St0cks are falling and bond yields are rising, but markets still don't seem convinced the Federal Reserve will pursue plans to keep increasing interest rates until inflation is under control. I'm still at a crossroads deciding if to liquidate my $150,000 stock portfolio, what's the best way to take advantage of this bear market?
@Rowland Trevor That's impressive! I could really use the expertise of this advisor, my portfolio has been stagnant.... Who's the person guiding you?
@Rowland Trevor Thanks for this tip. Her website popped up on Google immediately I searched her up. I read her resume and it seems pretty. I wrote her and I’m waiting on her reply.
@@rowlandtrevor balls
You should look in to A.I.M. method of investing by Robert Lichello.
something so great about this channel is making vague advice from successful people and breaking it down in to manageable and accessible steps for a novice to learn in only 15 minutes. 1 video a day like this is such a good way to learn rather than a daunting 3 hour video staring at financial statements. keep up the good work.
I spent more than two decades as an investment professional, and retired from a partnership in a money management firm in 2007, just before the crash. I had predicted the housing market crash in my newsletter in 1999. We used a value investing model similar to Buffet’s and got great results. I mention all this so that you’ll understand when I tell you that this young man is exactly right, my opinion is based on having made real money for real people in the real world for a really long time.
You can do this. If you can buy tuna fish on sale at the supermarket, you can invest in undervalued companies. It’s does take a bit of math, but the math isn’t hard, and there are many free apps and online calculators that will allow you to play with different variables and come up with your own value picks. The key (and this is crucial), is to be willing to treat the stocks you own like rental real estate. In other words, keep them for 5-10 years, minimum. That’s how you reduce the risk of day-to-day market gyrations.
This is definitely one of the best videos on a simple application of the DCF analysis. Good job on that!
I just found you today and binge-watched about 7 videos or more already. Great stuff! This is perfect for me, new to the investment system and tired of running the rat-race. Very well put together content and understandable. Keep up the good work! You got a new sub.
Read the book The Millionaire Fast lane and thank me later.
The be all end all bible of this investment approach is The Intelligent Investor by Graham. If you find this interesting I think you'd like that book. Graham was Buffets mentor.
@@KingsleyOkeze are you a millionaire?
These are the same analogies I use when explaining valuation to my students. Thanks!
The best description of Intrinsic Value on you tube, done well Awsome
Awesome presentation - best presentation on calculating intrinsic value of a stock that I have seen :)
Hi Brandon! Is there any management video you're working on?
Analyzing management is one of the main things to do when investing and I'd love to hear your thoughts and tips on that.
Keep up all this great work! Thanks for sharing!
Well done Mate, I’m reading Buffetology by Mary Buffet as we speak so I just couldn’t scroll past this one haha. Also, I like how you have introduced the slow zooms in your text scenes, very effective. Keep up the good work Mate 👌
I have seen this video like 3 times, everytime a see it i learn more. Love the video i hope you make more videos just like this one
This was by far the best demonstration about intrinsic value I have ever seen.
Mega thank you!
Would be a real gift if you could upload the template
I've always subtracted 25 to 30 percent of my evaluations for a margin of safety. I'm so happy that I'm not doing it wrong. Thanks.
Tbh I wanna go to school for this ! It's very interesting and empowering. Thank you NM!! You're the best CZcamsr in this area
The editing an new office are looking good! Thank you again for the lessons.
Love this breakdown. People say to "research the company" as if it's possible to have a quantitative gut feeling after a few web searches. I can actually follow this video and start building a workflow for value calculations
When people say research the company they don't mean check out the company's social media.
Research the company means the same thing in 2021 that it meant in 1921.
Get the quarterly & annual financial reports and study the math. Short term debt, long term debt, capital, cash, cash flow, and expenses. You also need to look at the company's future projections for the future. Then look at their past projections and examine how accurate those projections were. And if the company changes management, then you need to start over by researching past performance of the new management team.
If you just ran around the web looking at the company's footprint it's no wonder you've been having a hard time.
That sounds like a lot of work. But you don't go through all of that on every company.
When you find something you don't like (such as too much debt or not enough cash flow) you stop & move onto the next company on your list.
@@joecombs7468 well, the demoralizing truth is that even after you do all that for days and weeks your investment will still statistically be about the same as flipping a coin.
@@theWebWizrd no it won't. You are merely providing an excuse for future failure.
There is a reason why one business increases in value & one decreases.
It's not a coin flip, it finances.
But since you have an aversion to work, why don't you spend your time at a casino & leave investing to people willing to do the work.
@@joecombs7468 There is a reason why one business increases in value and another decreases. However, it has been shown beyond doubt that the vast majority of professionally managed investment fonds of the world - you know, people who literally do this for a living and make millions off of doing so - can't consistently beat the market. They go to work every single day and spend their entire day talking stocks, looking at stocks, analysing stocks, reading about stocks - and they can't beat the marked.
But sure, of course, you sitting at home watching youtube videoes and measuring up PE ratios know better. Surely, you'll perform better than all the mathematically calibrated trading algorithms ran on superclusters and the mutual fund managers with 30+ years of experience managing millions every day.
@@joecombs7468 You're bang on
Awesome video! I needed this reference point. Thanks for the break down! I feel better in my recent stock purchase
This video... is freaking golden. Thank you so much!
First video to watch in school every new year. Absolutely great. Reinvesting the dividends will be next, right?
great to see this laid out with examples, thank you
Wonderful explanation! You have just gained a new subscriber 🙂
Great explanation. Short and effective video. Thanks
Awesome video. Very useful. Thank you 🙏🏻 for this
Best investment advice channel on CZcams in my humble view. Thank you.
Great video, on the topic. Very pedagogic and easy to understand, thanks 👍
This is super easy to understand! Thanks for the explanation
Very nice explanation of Terminal Value and the discount rate! Thank you.
This was one of the most informative videos I’ve seen so far in 2022! Super interesting and important to know
i like your easy explanation on how to find the intrinsic value.
Good job mate
Made it a lot clearer and easier for me to understand
Great video! Thanks.
I didn't understand steps 4 & 5. May you please clarify?
Thank you
The current book Im reading, it uses EPS to calculate intrinsic value. Are there multiple approach to calculate intrinsic value?
Your willingness to make the viewer understand 🙌
great video, but how do you deal with their current balance sheet? Like do you add in their current cash and equivalents minus liabilities etc
A simpler strategy is to assume no growth, and check if the ratio of FCF to market cap is above some chosen threshold, say above 0.15. That's 15% appreciation per year.
Excellent video and explanation, though there is one additional thing to bear in mind. You must be sure that the Operating Cash flow does not put back in interest paid. Most companies don't do this so typically it is fine as you presented it, but some put interest paid (very common among REITs) back in when calculating FCF, then subtract it as a financing cash flow. So it's good to be aware of this.
I also suggest checking for cash flows out to preferred shares and minority interest (in the Cash Flows to financing) and subtracting these from the FCF as well, since FCF must represent cash flows available to the holders of common shares.
Very informative video, It would be nice if you can put some spreadsheets so everyone can understand the examples.
Thaks for your video very informative learned a lot !
These videos are great - keep up the great content.
Great video as alway. My question is how does the interest rate affect the calculation of intrinsic value? Please keep the excellent videos coming. I have learned so much from you and Hamish.
That's hard, QT and rate hikes generally make money harder to earn for most, while raising risk free rates.
czcams.com/video/qF0YLKK0nik/video.html
The short answer is it's irrelevant for this since he's valuing the stock against the total stock market/S&P 500. It's basically the opportunity cost of buying a 10 year treasury bond instead of the stock, so if you were only concerned about beating the 10 year treasury, you'd just substitute the total stock market/S&P 500 growth rate he used, with the yield of a 10 year treasury bond.
The interest rate on a treasury (a 10 year in this example) is the "risk free rate of return" because it's the safest investment. In bonds this the difference between a bonds yield and an equivalent treasury is called the "treasury credit spread" because since all other investments are riskier than the US t-bills, they should have a higher return.
Very well explained. Thanks!
Thank you for explaining this!
I m from India and want to learn more from your channel, but I have a request to you that if you explain the information in detailed manner like Google sheets, the stock components like how to calculate Intransic value, market capitalisation, discounted cash flow in graphical manner that would help me and others very much, and GOd will also bless you 🥰☺️
way to go ! Bravo !! Could you do a video containing a couple of real cases, that is a DCF analysis of a couple of stocks of your choice with particular emphasis on how you pick the the growth rate ? That be a fantastic hands on learning experience.
Thanks for everything, A
Yeah maybe looking back at a past example would be cool
@@NewMoneyCZcams too looking forward to it !
@@NewMoneyCZcams I agree, I think going back to analyze real life examples comparing them to today and maybe looking at a stock like $BABA to see the intrinsic value that Charlie is seeing right now would be a interesting video topic
A few examples would be great!! Please compare result to Market Capitalization for completeness. Until then I'll be watching this video over and over.
Thanks for the excellent description. I just need to make sense out of it for better understanding.
Nice video. Just the terminal value I have difficulties with. Doesnt the technique count values double as you count 10y fcf and a multiplier for terminal value? The 10years fcf will not be distributed so they will add to your selling value, of terminal value, no? Presumably you will be able to sell the company at year 11 at a similar selling multiplier over the fcf as your historical one without touching the fcf in the previous 10 years?
thank you so much for the video! however, I did not understand how the sum of the future cash flow can be used.
for example: with an FCF die 100 mil and MarktCap 3.3 B in 2020, and 30 dollar pro Share;
in 2030 the company has a Terminal value of 5.5 B and a sum future Cash Flow of 2 B, which divided by 10 years makes (an average of) 200 mil each year of cash flow,
the value of the company in 2030 is 5.5 B + 2 B = 7.5 B ? therefore more than twice the current value with a potential that the share in question at least double its value?
Can it also be used to give an indication of when to sell the stock?
Thank you very much for the clarification
Great video, nicely done. Thanks!
Great video. i use NPV to calculate innovation projects which is basically the same concept trying to answer the question: does it make sense to start R&D project today to get the the investment paid in the future? thanks for sharing
Is DCF analysis all you need to do before investing in a company? Or is there any other steps?
Great as always man!
How often should you update your intrinsic value?
Can the value change over time?
Thanks!!
Potentially redo the DCF after every earnings release as the most up to date FCF could have gone up or down thus altering the starting point of the model, or do it at the end of each fiscal year.
do it every year or half a year if your company is more dynamic
Hi, I'm new to this stuff.
Where do you get the historical market cap information?
Very good explanation on intrinsic value well done
Hey man - can you talk about that FCF multiple you used?
Thanks
Brilliant video!
Do i do at 6:25 do i do minus the negative or just minus the number regularly
This was a great explanation, thanks
Thank you!
Thank you 🙏
thank you for really detailed video..Is it possible for you to make video taking a live example of a company and showing us? like Tesla, is it overvalued or undervalued? As layman how to access all this details?
Bro you content are really awesome. I appreciate your efforts.😃
Thanks for watching bro!
This video almost explains Buffett's method but not quite. Both Buffett and Munger say there is no sense in making up your own required rate of return. In his 1993 letter to shareholders he said "My own feeling is that the long-term government rate is probably the most appropriate figure for most assets. And when Charlie and I felt subjectively that interest rates were on the low side - we'd probably be less inclined to be willing to sign up for that long-term government rate. We might add a point or two just generally. But the logic would drive you to use the long-term government rate." So they first work out reasonable figures for future cash flows, as you showed, then discount it by say 1%-3% per the government bond not an arbitrary 15% desired rate of return. Buffett generally ignores the value after 10 years with this method (as you would get an infinite result adding 10% each year and discounting only by 3%). The result is then very clearly bad if it gives a price anywhere close to the market value as you can get the same return from the government bond. Following Ben Graham's margin of safety rule, he only invests if the market cap is at least 30% less than the calculated intrinsic value (normally aiming for about 50% less).
Use this formula:
Diminuted FCFPS on Nth CROCI Profitability Year
= FCFPS * (1-λ^croci)÷(1-λ)
λ
= 1/(1+discount rate)
Great illustrations 👍👍👍
Very helpful thank you
perfect video of explanation thanks so much pal
Well explained of DCF method.
Thank you so much!!
I might be a thick so I apologize if I'm not following something properly. Was it intentional that the Jan 2022 FCF ($25.58B) was less than the 2021 FCF ($29.23B) used to calculate the FCF Multiple? I really enjoy your channel and your videos! I was just curious if I was missing something?
If the FCF growth rate and the discount rate are the same, do they cancel out?
It always bothers me that the Terminal Value is the largest item, thus making the Terminal Value assumptions the most important. Seems like you could just skip right to that and get within 10%
FINALY! I understand! Thank you SOOOOOOOOOO MUCH!
Do you have another to evaluate BANK? Thank you.
Perfect vid thanks
Nice video thank you
Thank you
Fantastic video! Subscribed! Thank you!
Thank you!
Useful video thanks
I'm sure that I'm missing something in the initial calculation of FCF. 104,038 less 11085 is 92,953 (92.95B). I see it as 92.95B on yahoo finance for the year 2021 as well. How did you get 24.58B? Thank you for your help.
Robert, I'm happy to see I'm not the only one who wasn't able to follow the numbers - did you get an explanation for this as I got the same as you?
I see at least 4 posts with the same question.
In a topic about finance the numbers are key to be able to build on confidence to be able to reproduce the outcome, and to use the technique on other companies.
It’s a pity that there is no response at all from NM.
I get the feeling it’s only about getting the likes.
Unfortunately, I haven't gotten a response yet.@@janetdawes7925
Really great video. Keep up the good work
Very nice and with less annoying promotions than usual :)
Great explaination
Very helpful video though, thank you.
This was so good video. THANK YOU!
Excellent piece.
Great video. Thanks!
Do you know of any tools that have this calculator ready to absorb user inputs?
Thanks. I feel smarter now. 👍🏻
Really fun video! "That's it guy's" too good.
This is an excellent video. The clearest explanation of intrinsic value I have seen on the web. Taking into account the variables of future growth expenditures this is a great way to see if there is a margin of error in a potential stock pick. Thank you for this!!!
This is the bushit video
@@28jery says the guy that cant spell? Lol. Okay bro.