Warren Buffett Brilliantly Explains Discounted Cash Flow

Warren Buffett and Charlie Munger explain the discounted cash flow (DCF) model and elaborate on which discount rate is appropriate for calculating the intrinsic value of a company. They also talk about the opportunity cost which is very significant when it comes to choosing stocks to buy.

The question goes: “The gentleman from Australia asked about margin of safety, and you replied that a superior business may not require that much of a margin of safety. And my follow-up would be, does that suggest market rate of returns going forward for superior businesses? And then on the Munich valuation, in which you cited a farm example on discounted cash flows, I’m very curious how you come up with your discount rate and how you might adjust that discount rate based upon various businesses. You might want to discuss your discount rates used for Coca-Cola, J&J, or some of your past investments. Thank you.”
From Berkshire Hathaway Annual Shareholders Meeting. (2007)

Warren E. Buffett is an American long-term investor, philanthropist, business tycoon, and the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth over 100 billion dollars. Buffett was born in Omaha, Nebraska. He developed an interest in business and investing in his youth and made truly incredible stock market returns over his career.

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Warren Buffett Brilliantly Explains Discounted Cash Flow