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The Coca-Cola Company Message Board

  • Novalis_97 Novalis_97 Apr 3, 1998 3:55 PM Flag

    Buffett on Value

    "Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses."

    "In our view, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."

    What Buffett means by, "How to Value a Business," is knowing how to compute the present value of a business's future cash flows.

    Knowing a company's intrinsic (or true) value is the best tool an investor has when considering buying stocks (not P/E). If you have no idea what a company's true value is, you risk overpaying for its stock. Knowing a company's intrinsic value is like knowing a new car's invoice before buying it. You know what the car's actual cost is and, therefore, whether you're getting a good deal or being ripped off. Intrinsic value is the basis of intelligent investing.

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    • Hey, I like your posts, but your analogy between intrinsic value and automobile invoices misses the mark. A dealer invoice might show you what the dealer's cost is, but that has nothing to do with the vehicle's intrinsic value. Knowing what a dealer pays for a car is more like knowing yesterday's market price of KO.

      A car's intrinsic value would be derived by assigning dollar values to each of the benefits (both tangible and intangible) of ownership. The sum of those values would give you the overall intrinsic value. The price the dealer (or anyone else) paid for the car is entirely irrelevant in this analysis, just as the market price of KO is irrelevant in assessing KO's intrinsic value.

      • 1 Reply to Luvadventure
      • I never said a dealer's invoice had anything to do with intrinsic value. I said that KNOWING WHAT THE INVOICE IS helps you determine whether you're paying a fair price for the car or paying too much. Similarly, knowing the intrinsic value of a company's stock before you buy it helps you determine whether you're buying the stock at a bargain or overpaying. This is a very simple concept.

        Believe me (I used to sell cars), it is to the salesman's advantage that you not know the car's invoice. On the other hand, it is to the car buyer's huge advantage to know the car's invoice when negotiating a price.

    • Cars are different from stocks. You can most likely pay a "fair value (a little over invoice)" for a new car, but you are perfectly able to pay below a stock's intrinsic value, if the current price of a stock is below its intrinsic value.

      It used to be that Warren Buffett used to only look for excellent companies whose stock price was far below its intrinsic value. Then, Charlie Munger came along and convinced Buffett that sometimes it was worth it to pay a "fair price" if the company was excellent and, therefore, worth a fair price.

      But either way, KNOWING what a car's invoice is or a firm's intrinsic value is before buying it allow you to determine whether you're getting a deal or overpaying.

 
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