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What Discount Rate Are You Using


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I have been listening to some old Berkshire annual meetings in the late 90s.

Buffett said that he uses the long term US government bond rate as his discount rate, unless the government bond rate is very low, then he might use a slightly higher number.

 

Obviously, the long term bond rate is very low right now with around 2% on the 30 year bond and 1.5% on the 10 year bond rate.

My understanding is that Buffett would use the 10 year rate, not the 30 year rate normally.

 

I've also read that Joel Greenblatt says he will always just use 6% if the risk free rate is lower than 6%.

 

The reason I am asking is that I heard that Buffett recently said stock prices are pretty fair if you believe the interest rates will stay low like this forever. 

 

So I am wondering, should one use 6%? Or a lower number?

 

I am also wondering if a simpler way to look at it might be just to use 10% as the discount rate at all times, unless of course the risk free rate is above 10%.

Then you could just find the stock with the highest yield you want.

This idea came from another Buffett annual meeting where he said it doesn't really matter what discount rate you use, you are just comparing one opportunity with another.

 

What discount rates are others in the forum using right now?

 

Edited by therealbg
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What return do you need to compensate you for equity risk?  

 

I think Buffett talked about using the 10 year bond because it reflected the confidence he had in his positions. Using the 10 yr to value Coke, for example. I'm assuming he wouldn't apply that to a company like Snowflake. 

 

 

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My understanding was that at least early on Buffett was looking for 15+% on his money.  My memory might be failing me here, but I thought I heard that a couple of times - once might have been from Alice Shroeder's speech, and another time, it might have been an answer from Buffett/Munger to the question of what is the cost of capital they tell their own companies. 

 

So, I'm surprised Buffett said using government bond rate as his discount rate.  @Spekulatius, would it be possible to share the link to the annual meeting you found this in?  You got me curious :-).

Edited by LearningMachine
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I believe he used the 30 year yield because he invested in predictable certain fcf machines. I think i've heard stuff like 5%. But I would build in a margin of safety into the discount rate just like I would into stock valuation. It's a little double counting but as long as you are aware of the range...

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