The year 2000 was the year that could easily go down in Berkshire's history as the ‘year of acquisitions’. Sensing favorable market conditions, the master completed two transactions that were initiated in 1999 and bought another six businesses during 2000, taking the total to eight. This steady stream of acquisitions is perhaps what inspired him to once again bring his theory of valuations out from the closet and present it before his shareholders. However, while the underlying principles of his theory remained the same, it came cloaked in a different analogy.
This time, the master has turned to Aesop for help and likens the process of performing valuations to his famous saying - 'a bird in the hand is worth two in the bush'. Without getting too much into details, suffice to say that the master reaffirms his faith in the discounted cash flow approach to valuations and believes it to be the single most important tool in valuing assets of any kind, right from stocks to as exotic assets as royalties and lottery tickets.
- How certain are you that there are indeed birds in the bush?
- When will they emerge and how many will there be?
- What is the risk-free interest rate (which we consider to be the yield on long-term US bonds)?