1995: How many years out does Buffett discount earnings?

AUDIENCE MEMBER: Hi, this —

WARREN BUFFETT: (Inaudible)

AUDIENCE MEMBER: — Keith Briar from San Francisco.

I have a question. When you’re valuing the companies and you discount back the future earnings that you talk about, how many years out do you generally go? And if you don’t go out a general number of years, how do you arrive at that time period?

WARREN BUFFETT: Well, that’s a very good question. And it’s — I mean, it’s the heart of investing or buying businesses, which we regard as the same thing, but —

And it is the framework in which we operate. I mean, we are trying to look at businesses in terms of what kind of cash can they produce, if we’re buying all of them, or will they produce, if we’re buying part of them. And there’s a difference. And then at what discount rate do we bring it back.

And I think your question was how far out do we look, and all that.

Despite the fact that we can define that in a very kind of simple and direct equation, you know, we are — we’ve never actually sat down and written out a set of numbers to relate that equation.

We do it in our heads, in a way, obviously. I mean, that’s what it’s all about.

But there is no piece of paper. And we never — there never was a piece of paper that shows what our calculation on Helzberg’s or See’s Candy or The Buffalo News was, in that respect.

So, it would be attaching a little more scientific quality to our analysis than there really is, if I gave you some gobbledygook about, “Well, we do it for 18 years and stick a terminal value on and do all of this.”

We are sitting in the office thinking about that question with each business or each investment. And we have discount rates, in a general way, in mind.

But we really like the decision to be obvious enough to us that it doesn’t require making a detailed calculation.

And it’s the framework. But it’s not applied in the sense that we actually fill in all the variables.

Is that a fair way of stating it, Charlie?

CHARLIE MUNGER: Yeah. Berkshire is being run the way Thomas Hunt Morgan, the great Nobel laureate, ran the biology department at Caltech.

He banned the Friden calculator, which was the computer of that era. And people said, “How can you do this? Every place else in Caltech, we have Friden calculators going everywhere.”

And he said, “Well, we’re picking up these great nuggets of gold just by organized common sense, and resources are short, and we’re not going to resort to any damn placer mining as long as we can pick up these major aggregations of gold.”

That’s the way Berkshire works. And I hope the placer mining era will never come.

Somebody once subpoenaed our staffing papers on some acquisition. And of course, not only did we not have any staffing papers, we didn’t have any staff. (Laughter and applause)