WARREN BUFFETT: If it doesn’t take too long,
we’ll be glad to,
although I think I know the answer already.
(Laughs)
AUDIENCE MEMBER: OK.
We ended 2003 with about 5.422 billion of operating earnings.
I estimated our look-through earnings to be approximately 915 million.
So in total, that was about 6.337 billion of estimated look-through earnings.
I knew that we spent a billion-two on CAPEX,
and our net depreciation on tangible assets
was 829 million. So, there was a difference there of 173 million.
And we spent more on CAPEX over the appreciation, over the last few years.
But in extrapolating out 20 years,
I thought I might be kidding myself to ascertaining
the differences between CAPEX and depreciation.
And I’m using look-through earnings
as a rough proxy for distributable earnings.
And I’ve assumed
that Berkshire can grow its look-through earnings at 15 percent per annum,
from years one to five, and at 10 percent per annum, from years six to 20.
And the business will stop growing after year 20,
resulting in a 7 percent coupon from year 21 onwards.
I discounted the cumulative flows in years one to 20 by 7 percent,
and I discounted the terminal value by 7 percent.
I added the two together,
to get what I thought was the intrinsic value of Berkshire’s cash stream.
I knocked off 103 billion of liabilities and minority interests.
I divided by 1,537,000 shares,
to arrive at what I thought was a conservative calculation of the range
of Berkshire’s intrinsic value.
Am I off the mark, or is that the sort of methodology you might use yourself?
WARREN BUFFETT: Well — (Laughter and applause) —
well, you’ve done your homework.
(Laughter)
The
The line of thinking is correct,
it just depends on what variables you plug in.
And we might have different ideas on variables, and neither one of us knows.
But
the approach, in general, the approach of trying to figure out
distributable cash over a period of time. The business today is worth,
the present value at some number — you’re using 7 percent,
but the question of what number to use —
But it’s worth the present value
of all the cash it can distribute between now and Judgment Day.
And if cash can be retained, and it’s at a rate higher — it produces —
at a rate higher than your discount rate, obviously,
you’ll get some benefit from that retention.
But,
you know, I would say that your assumptions about CAPEX,
and
related to depreciation,
I would expect CAPEX to be, on average,
a little more than depreciation unless we run into highly inflationary
times.
But of course, we have to keep buying businesses,
and using the capital in the business that we retain.
If we retain those earnings, we have to use that to buy more businesses.
And then the question is, what kind of returns can we expect on those?
I don’t quarrel with the approach you’re using,
but, you know, everybody has to do their own
equation and plug in some numbers.
And I think we might settle for lower numbers on
earnings gains than you postulated because we’re very large,
and it’s — it gets harder all the time
to deploy the kind of funds that keep flowing into Omaha.
Charlie?
CHARLIE MUNGER: Yeah, and you shouldn’t necessarily get
overly excited about last year, as Warren said,
that was a very unusual year when everything worked together pretty darn well.
WARREN BUFFETT: Except interest rates on —
CHARLIE MUNGER: Yeah, well, but a lot worked together very well.
The interesting thing about Berkshire’s present valuation is how much cash,
and cash equivalents it has to do something.
And that is a very interesting question.
How well are we going to do with this
massive amount of investable cash and cash equivalents?
WARREN BUFFETT: Yeah, we should be out working now. I mean — (laughter) —
that is the test.
I mean, we’ve got a bunch of good businesses.
We’ve got a lot of money that we’d like to use to buy more good businesses.
We may get lucky and
deploy that quite rapidly. We may wait a long time.
Cash may pile up faster than we can use it,
in which case we’ll have to rethink the whole game.
But our hope is
— and so far we feel OK about what’s happened in that —
our hope is that we can deploy
the money that flows in at — in businesses that
come close to being as good as the ones that we’ve bought over the years.