Understanding Intrinsic Value

Intrinsic Value versus Market Price

Buffett's core investment measure is finding the intrinsic value of a company and being certain the price he pays for the company is justified by that intrinsic value.  The definition of intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life.

The key secret there is that the way to calculate intrinsic value is not precise.  It's based on a lot of assumptions, and those assumptions can be easily adjusted based on anticipated interest rate.

Buffett never gives investors the intrinsic value he has calculated for a company, but he will give details in his annual reports relating to the facts that he and Munger used to determine the intrinsic value of a company.

Buffett believes Berkshire Hathaway's book value far understates its intrinsic value because many of the businesses Berkshire Hathaway controls are worth much more than their carrying value.

Also read:

Fair Valuation of Berkshire Hathaway