2000: What does Munger think of EVA?

AUDIENCE MEMBER: Hi, my name is Jason Tang (PH) from Traverse City, Michigan. Before I ask my question, I want to know if it’s true that you guys are going to be here tomorrow at 9:30 to answer more questions. (Laughter)

My question: I just recently read the book Quest for Value by — I think the author is Bennett Stewart, from Stern Stewart consulting firm. I’d like to ask you about different valuation methodologies, particularly EVA, and how that may or may not be more valid than, say, other benchmarks of value like P/E, price-to-book, or price-to-sales.

I noticed the language in this book sounded similar to the type of language you guys use in your writings. Could you talk a little bit about EVA?

WARREN BUFFETT: Charlie, why don’t you take EVA?

CHARLIE MUNGER: I think there’s an awful lot of twaddle and bullshit. (Laughter)

WARREN BUFFETT: I knew that’s what he was going to say. And I thought it deserved it, so — and I didn’t want to say it myself.

CHARLIE MUNGER: In EVA, we keep stating, over and over again, that the game is to turn retained dollars into something more than dollars. EVA tends to incorporate cost of capital ideas that just make no sense at all. They make it sound very fashionable.

God knows, it’s correct that a corporation earning a huge return on capital and retaining it for a long time will have a great record in terms of EVA. But the mental system, as a whole, does not work. It’s like medieval theology. (Laughter)

WARREN BUFFETT: I like that second term better than the earlier one. (Laughter)