We all know Warren Buffett subscribes to the concept of Intrinsic Value – but one key factor is that valuations to him are only taken with a pinch of salt. He prefers to focus on the fundamentals (moat, healthy margins, growing cashflows) of the business and honest & competent management.
On the difficulty of finding Intrinsic Value, he mentions in his 2014 Berkshire Annual Report, “Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost inevitably come up with at least slightly different intrinsic value figures.”
However, he is wary of very optimistic numbers on GROWTH. And only buys when the present value of the stock itself is undervalued compared to the market. The growth component is just icing on the cake.
Although he also previously mentions “Market Cap-to-GDP” as a measure for seeing if markets are generally overvalued or undervalued, investors and the media have overhyped this mention and named this as the “Buffett Indicator”, which is misleading and not representative of how Buffett does value investing.
Instead of solely focusing on this metric, here are two other “Buffett indicators” that more accurately explain his rational approach when buying stocks:
Doesn’t care about activities of the stock market at all: “My favorite holding period is forever”… When Buffett invests in a company, he isn’t concerned with whether the market will eventually recognize its worth. He is concerned with how well that company can make money as a business.
On Interest Rates: “If interest rates are destined to be at low levels. … It makes any stream of earnings from investments worth more money. The bogey is always what government bonds yield.”
… “And the 30-year bond should tell you what people are willing to put out money for 30 years and have no risk of dollar gain or dollar loss at the end of the 30-year period. But what better figure can you come up with? I’m not sure I can come up with a better figure. But that doesn’t mean I want to use the current figure, either.”