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Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Aug 16, 1998 8:58 PM Flag

    The intrinsic value of Pepsi

    While we may (or may not) be entering a period of
    low interest rates, that is only the immediate
    future. We're talking about what interest rates will be,
    on average, FOREVER INTO THE FUTURE. That is the
    crucial point. Are you willing to bet your investment
    dollars on the proposition that interest rates are going
    to remain at 5-7% FOREVER INTO THE FUTURE
    (essentially you're making a prediction about future interest
    rates)??? Buffett isn't. So he uses 10%. Not too long ago
    Buffett said as long as interest rates stay low and ROE's
    stay high, stocks need not be considered overvalued.
    But he said neither of these conditions was likely to
    remain true in the long run (so better not use a 5-7%
    discount rate in your valuation
    calculation).

    Incidentally, there are indications that, while some people
    believe we're heading toward a period of low interest
    rates, Buffett believes the opposite. First, Buffett has
    sold all of his zero-coupon government bonds. The
    value of zeroes goes up when interest rates go down
    (which was the case last year, so Buffett made a
    killing), but their value goes down when interest rates go
    up. Buffett's decision to sell all his zeros
    indicates he believes interest rates will not continue to
    go down. Second, Buffett sold some of his Frediie
    Mac last year (and is probably selling more this
    year) for the same reason that he sold his zeros:
    mortgage interest rates are going to go up.

 
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