Warren Buffett's Hurdle Rate

[Jurgis]

Buffett's words were, "It has to be obvious."

 

Rrrright.... So not counting 2009, which Buffett's recent purchases have been "obvious"? Or perhaps you can tell which of your recent purchases have been "obvious"?  :)

[HWWProject]

However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.

 

Hi Vinod - do you know in what year Buffett made this quote?  I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period.  Hoping to calibrate the equation somewhat to see what there is to learn.

[Liberty]

Buffett's words were, "It has to be obvious."

 

Rrrright.... So not counting 2009, which Buffett's recent purchases have been "obvious"? Or perhaps you can tell which of your recent purchases have been "obvious"?  :)

 

Obvious to him doesn't mean obvious to everyone. Otherwise, there wouldn't be much opportunity to take advantage ;)

[vinod1]

However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.

 

Hi Vinod - do you know in what year Buffett made this quote?  I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period.  Hoping to calibrate the equation somewhat to see what there is to learn.

 

Sorry, I do not remember the exact source or date of this quote. He is giving an example and that is not the rate that he is actually using. Munger said something around the fact that they would not be using a much lower discount rate than 10% - even if treasury rates go much lower.

 

My understanding is that Buffett/Munger use something like 10% as the discount rate and adjust it upward if long term rates are much higher than 10% but they do not want to adjust it much below 10% even if rates are very low. As Buffett says they have margin of safety at every step of the way when valuing a business.

 

Vinod

[LC]

Buffett's words were, "It has to be obvious."

 

Rrrright.... So not counting 2009, which Buffett's recent purchases have been "obvious"? Or perhaps you can tell which of your recent purchases have been "obvious"?  :)

 

Obvious to him doesn't mean obvious to everyone. Otherwise, there wouldn't be much opportunity to take advantage ;)

Obviously! (sorry)

 

Apple sub-400 was pretty obvious IMHO.

[vinod1]

However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.

 

Hi Vinod - do you know in what year Buffett made this quote?  I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period.  Hoping to calibrate the equation somewhat to see what there is to learn.

 

You would not find much on discount rates from Buffett because he is on record as saying that he does not use discount rates.

 

Charlie talked a little bit more on this and he adds an interesting twist, that of comparing to the best alternative you have.

 

Vinod

[Guest longinvestor]

Buffett's words were, "It has to be obvious."

 

Rrrright.... So not counting 2009, which Buffett's recent purchases have been "obvious"? Or perhaps you can tell which of your recent purchases have been "obvious"?  :)

 

Obvious to him doesn't mean obvious to everyone. Otherwise, there wouldn't be much opportunity to take advantage ;)

Isn't it the Berkshire acquisition criteria that makes it obvious? And at the time the deal comes across their desk.  Van Tuyl and Iscar tools became obvious but not before they were offered to Berkshire.  How about that motorcycle parts biz in Germany?

[calonego]

"What rate does Buffett use" argument - not to beat a dead horse... but he's stated many times that he doesn't use one.

 

I bet he spends more time learning about an industry and a business and where the competitive advantages are - where the one or two "secrets" to that business lie - and buys at a fair valuation according to that.

Jim Pattison was at the BRK AGM and some of the ancillary events last year. I bet their relationship has more to do with buying Van Tuyl than a discount rate.