Thursday, November 12, 2009

Buffett on Aesop's Formula for Value

Back in February students from business schools were invited to come visit Warren Buffett for a Q&A session.

Here are some excerpts from notes taken during the visit including, among other things, a formula for value that goes back to 600 BC:

When I do invest, I don't care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven't…

Well, at least not since the early days. Buffett prefers to always be in a strong position and too much debt can get in the way of that.

The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don't really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I don't care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about if there's price flexibility and whether the company can gain more market share. I care about people drinking more Coke.

I bought a farm from the FDIC 20 years ago for $600 per acre. Now I don't know anything about farming but my son does. I asked him, how much it cost to buy corn, plow the field, harvest, how much an acre will yield, what price to expect. I haven't gotten a quote on that farm in 20 years.

Check out the notes in their entirety.


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