Buffett's Value Formula (?)

Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:


Earnings per share (last 12 months): $
Growth Assumptions
Earnings are expected to grow at a rate of % annually
for the next years,
before leveling off to an annual growth rate of % thereafter.
Confidence Margin
How confident are you that these expected future earnings will really materialize?   %
Discount Rate
Best available return that you have 100% confidence in (like a Treasury bond):   %
Stock Value per share: $


       This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident will yield more cash.

One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he does he keeps it simple, Slugger.



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Buffett Formula (?)
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Also See
Valuation Formula
Stock Market Predictions
Measuring Investment Returns
Stock Market CAGR