This article, a summary of ten questions and answers to summarize Buffett's valuation system, the key part of the content, I have thickened.

Q1: how do you view value?

Q1: How do you think about value?

Answer 1: the value formula was handed down by a man named Aesop in 600 BC: one bird in the hand equals two birds in the forest. Investment is to release a bird into the bushes at present, hoping to recover two or more birds from there in the future. The key questions only include: 1) study the bushes you like; 2) determine how many birds you can catch in the future and how long it will take to catch them. If the deposit interest rate is 20%, catch the bird quickly (by implication, you can deposit it in the bank). If the deposit interest rate is only 1%, let's wait ten years. Think carefully about the benefits that assets can bring. Be sure to focus on assets rather than beta valuesPersonally, I don't care about the fluctuation of the stock price, so to me, the stock price is not important, maybe it is just to provide you with the opportunity to buy the stock cheaply.I don't care if the New York Stock Exchange is closed for five years.I am more concerned about business than all kinds of events.I care about the pricing power of the product and whether the company can get more market share.I also care whether people consume more cola.

A1: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.

Twenty years ago, I bought a farm from the Federal Deposit Insurance Corporation (FDIC) for $600 per hectare. To this day, I don't know anything about running a farm, but my son is good at it. I once asked him what is the cost of buying corn (seeds), arable land and harvest, what is the yield per hectare, and what is the price of grain. But for twenty years I never knew what the market price of that farm was.

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.

If I were to open a business school, I would only teach two courses. There is no doubt that the first course is an investment course on how to value a company. The second door is to talk about how to view the stock market and how to deal with stock price fluctuations. The stock market is very interesting. You may not have any intention of buying or selling yourself, but a large group of idiots are constantly offering different prices, which gives you a great advantage. I want the market to be like a drunk who is sometimes manic and sometimes depressed.

If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility. The stock market is funny. You have no compulsion to act and a bunch of silly people setting prices all the time, it is great odds. I want the market to be like a manic depressive drunk.

Q2: how to calculate the intrinsic value?

Q2: How do you calculate intrinsic value?

Answer 2: intrinsic value is a very important but flexible concept.We try to buy companies where we can foresee the future with a good chance.If you have a gas pipeline, you are much less likely to go wrong. The intervention of competitors may force you to lower the valuation of gas pipelines, but if you have considered this factor (competitor intervention will lead to lower asset prices), your intrinsic value will not be reduced by the intervention of competitors. Recently, we have been examining a gas pipeline and we have considered the impact of other ways of supplying gas to the area of the pipeline on the intrinsic value of the pipeline. For another gas pipeline, whose cost is very low, we have a different view (because it will not face the threat from another competing pipeline). If you want to calculate the intrinsic value reasonably, you must consider some factors, such as the declining valuation.

A2:Intrinsic value is terribly important but very fuzzy. We try to work with businesses where we have fairly high probability of knowing what the future will hold. If you own a gas pipeline, not much is going to go wrong. Maybe a competitor enters forcing you to cut prices, but intrinsic value hasn't gone down if you already factored this in. We looked at a pipeline recently that we think will come under pressure from other ways of delivering gas[To the area the pipeline serves]. We look at this differently from another pipeline that has the lowest costs[And does not face threats from alternative pipelines]. If you calculate intrinsic value properly, you factor in things like declining prices.

When we buy a business, we try to estimate the cash flow that the business can generate in the future and compare it with the purchase price. We must have considerable confidence in our forecasts and come up with a reasonable buying price.For a long time, we have had a lot more surprises than we expected.

When we buy business, we try to look out and estimate the cash it will generate and compare it to the purchase price. We have to feel pretty good about our projections and then have a purchase price that makes sense. Over time, we've had more pleasant surprises than we would have expected.

I have not seen any investment bank predict in their research report that the future earnings of a company will continue to decline, but the reality is that the earnings of many companies will be lower than those of the previous year. We made a similar mistake at Dexter shoes-last year the company made a pre-tax profit of $40 million, which I thought could be maintained, but I was so wrong. In the next five years, 20% of the Fortune 500 companies will see a significant decline in profits, of course, I do not know which companies. If you can't make a reasonable prediction about this, don't worry about it.

I've never seen an investment banker's book in which future earnings are projected to go down. But many businesses' earnings go down. We made this mistake with Dexter shoes-it was earning $40 million pretax and I projected this would continue, and I couldn't have been more wrong. 20% of Fortune 500 companies will be earning significant less in five years, but I don't know which 20%. If you can't come up with reasonable estimates for that, then you move on.

Q3: which tools do you think are the most important in determining intrinsic value? What rules and standards are followed when using these tools?

Q3: What do you believe to be the most important tools in determining intrinsic value? What rules or standards do you apply when using these tools?

答3：For any business, if we can calculate its cash flow over the next 100 years and discount it back to the present at an appropriate interest rate, we can get a number that represents intrinsic value.It's like a bond maturing in a hundred years, and there will be a lot of coupons under the bond. There are also "coupons" in business, and the only problem is that those coupons are not printed under them like bonds, but need to rely on investors to estimate what kind of coupons will be attached to future business. We have no idea what kind of coupon will be attached to high-tech businesses or businesses with similar attributes. For the business we know better, we try to "print" the coupon.If you want to calculate intrinsic value, the only thing you can rely on is cash flow. If you want to put cash into any investment, your goal is to expect the business you invest to bring you more cash inflows later on, not to expect to sell it to others for a profit.The latter is just a game of who beats whom. If you are an investor, your attention is focused on the performance of assets; if you are a speculator, your attention is focused on how prices will change-this is not a game we are good at.We believe that if our understanding of business is correct, we can make money; if our understanding of business is wrong, we will not be able to make a profit.

A3:If we could see in looking at any business what its future cash flows would be for the next 100 years, and discount that back at an appropriate interest rate, that would give us a number for intrinsic value. It would be like looking at a bond that had a bunch of coupons on it that was due in a hundred years... Businesses have coupons too, the only problem is that they're not printed on the instrument and it's up to the investor to try to estimate what those coupons are going to be over time. In high-tech businesses, or something like that, we don't have the faintest idea what the coupons are going to be. In the businesses where we think we can understand them reasonably well, we are trying to print the coupons out. If you attempt to assess intrinsic value, it all relates to cash flow. The only reason to put cash into any kind of investment now is that you expect to take cash out--not by selling it to somebody else, that's just a game of who beats who--but by the asset itself... If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game. We feel that if we're right about the business, we're going to make a lot of money, and if we're wrong about the business, we don't have any hopes of making money.

[Munger: in the process of optimizing the portfolio, I think the concept of opportunity cost is very useful. If you have a good investment opportunity with a large scale of applicable funds, which is better than the other 98%, then you should give up the other 98%. In this way, you can form a very compact portfolio. What we do is very simple, but it is not widely accepted by others. I don't know why. This is true even in well-known universities or advanced research institutions. Here is a very interesting question: if we are right, then why are so many people wrong?]

[CM: I would argue that one filter that's useful in investing is the idea of opportunity costs. If you have one idea that's available in large quantity that's better than 98% of the other opportunities, then you can just screen out the other 98%. With this attitude you get a concentrated portfolio, which we don't mind. That practice of ours which is so simple is not widely copied, I don't know why. Even at great universities and intellectual institutions. It's an interesting question: If we're right, why are so many other places so wrong.]

There may be the following answers to this question! The first thing we have to ask ourselves is, if we like a company, are we willing to buy that company, or are we willing to buy more Coca-Cola Company shares or more Gillette shares with the money we bought from that company? We want to buy more promising companies like Coke or Gillette, otherwise we will think that it is wise to increase our holdings of Coca-Cola Company. Before buying a business, if every operator asks if the deal is better than buying our company or Coca-Cola Company's stock, then the acquisition activity will be much less. We try to see if our behavior is closer to what we can do to achieve perfection.

There are several possible answers to that question! The first question we ask ourselves is, would we rather own this business than more Coca-Cola, than more Gillette.... We will want companies where the certainty gets close to that, or we would figure we'd be better off buying more Coke. If every management, before they bought a business, said is this better than buying in our own stock or even buying Coca-Cola stock, there'd be a lot less deals done. We try to measure against what we regard as close to perfection as we can get.

Q4: can you tell us about the intrinsic value of your so-called "must hold shares"?

Q4: Could you comment on the matter of intrinsic value as it applies to some of the Inevitables?

Answer 4: OK, but I don't want to give them a specific price. These companies are great and run by outstanding managers, and their share prices are higher than they have been for most of the past. Whether from the current point of view, or from the perspective of the next few years, the current price is good value for money. Gillette never buys back shares. And Coke is often bought back.

A4:Well, we won't stick a price on it. They are absolutely wonderful businesses run by sensational people, and they are selling at prices that are higher than they've sold at most of the time. But they may well be worth it, either in present terms, or they may be a couple of years ahead of themselves. Gillette doesn't repurchase their shares... Coke consistently repurchases their shares.

Generally speaking, I prefer companies that run a good business and like to buy back their own shares. But the problem with most companies that buy back their own shares is that their own business is very mediocre, and the purpose of their repurchase is not to enhance shareholders' interests in good business.

We generally like the policy of companies that have really wonderful businesses repurchasing their shares. The problem with most companies repurchasing their shares is that they are frequently so-so businesses and they are repurchasing shares for purposes other than intensifying the interest of shareholders in a wonderful business.

In the world we live in, it is not easy to use money wiselyBut Coca-Cola Company is very smart in using the money, especially in improving the bottling business network around the world. Knowing this, you will feel like buying more companies like Coca-Cola Company (it will feel great).

It's hard to do things intelligently with money in this world and Coke has been very intelligent about using their capital, particularly to fortify and develop their bottler network around the world, but there's only so far you can go with that, and to enhance the ownership of shareholders in a company like Coca-Cola[Is great].

Q5: when estimating intrinsic value, for capital-intensive companies such as McDonald's Corp and Walgreens, their very healthy and growing operating cash flow is used to open new stores, how do you estimate future free cash flow? What is the discount rate?

Q5: When you estimate intrinsic value in capital intensive companies like McDonald's and Walgreens where a very healthy and growing operating cash flow is largely offset by expenditures for new stores, restaurants, etc how do you estimate future free cash flow? And at what rate do you discount those cash flows?

答5：We use the same discount rate for different stocks.In some cases, we may be more conservative in forecasting cash flow.

A5:We use the same discount rate across all securities. We may be more conservative in estimating cash in some situations.

It's not because the interest rate is 1.5% that we like investments with a 2-3% return. We have a threshold of return on investment that is much higher than the current interest rate in the country. When we look at a business, we think about long-term holdings, and we don't think interest rates will stay this low.

Just because interest rates are at 1.5% doesn't mean we like an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot higher than government rates. When we're looking at a business, we're looking at holding it forever, so we don't assume rates will always be this low.

I don't have a strict discount rate.Whenever I talk about it, Charlie always reminds me that I haven't prepared a calculation table yet, but it's already in my head.

We don't formally have discount rates. Every time we start talking about this, Charlie reminds me that I've never prepared a spreadsheet, but I do in my mind.

The business we want to buy will have a higher return than government bonds-the crux of the question is how much higher? If the yield on government bonds is 2%, we will not buy a business with a return of 4%.

We just try to buy things that we'll earn more from than a government bond-the question is, how much higher? If government bonds are at 2%, we're not going to buy a business that will return 4%.

I don't call Charlie every day and ask him, "what's our yield threshold?" "We never use this concept.

I don't call Charlie every day and ask him, "What's our hurdle rate?" We've never used the term.

Munger: the yield threshold is just a meaningless concept, but a lot of people have made a lot of serious mistakes about it. When examining many investments, it is necessary to compare the rate of return of each investment separately. I don't think there is a good choice to replace this method. )

Munger: The concept of a hurdle rate makes nothing but sense, but a lot of people using this make terrible errors. I don't think there's any substitute for thinking about a whole lot of investment options and thinking about the returns from each.

(Munger: the problem is not that we don't have (the yield threshold)-- we actually do-- but it comes from a logical comparison. If there is an investment that is sure to yield 8%, then we will reject the 7% yield immediately. As in the plot in "Mail order Bride", if the bride sent to you by the bridal company has HIV, I won't waste my time thinking about it. Everything is the opportunity cost at work. )

The trouble isn't that we don't have one[A hurdle rate]-we sort of do-but it interferes with logical comparison. If I know I have something that yields 8% for sure, and something else came along at 7%, I'd reject it instantly. It's like the mail-order-bride firm offering a bride who has AIDS-I don't need to waste a moment considering it. Everything is a function of opportunity cost.

Q6: is the ability to judge risk as important as the ability to calculate intrinsic value?

Answer 6: we see risk as a factor that will have a negative impact on business in the future. We want to be able to quantify the risks of a series of decisions rather than getting involved in a series of businesses with visible risks. We hope that the business involved can have a moat. At the same time, we also hope that the moat involved in the business can be continuously expanded. The widening moat is the most important sign of good business.

A6:We perceive risk as items that impair future business. Wants to have mathematical risk on their side over a group of decisions. Not in the business of assuming a lot of risk in business. We look for moats around businesses. We look for castles (businesses) that have a moat surrounding it which is expanding as a primary consideration of a great business.

Q7: what valuation indicators do you use?

Q7: What valuation metrics do you use?

Compared with the Standard & Poor's 500 IndexThe reasonable PE multiple of a business depends on the return on net assets and incremental investment capital of the business. I will not just look at a single valuation indicator such as relative PE multiples. I don't think PE, PB, PS and other indicators can provide you with a lot of valuable information. You want to have a formula, but it's not easy to get such a formula. If you want to value something, you just need to calculate the free cash flow it can generate from now to the distant future, and then convert that cash flow to now using an appropriate discount rate. Cash equals cash. You only need to assess the economic nature of a business.

The appropriate multiple for a business compared to the depends on its return on equity and return on incremental invested capital. I wouldn't look at a single valuation metric like relative P/E ratio. I don't think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. People want a formula, but it's not that easy. To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business's economic characteristics.

Q8: how to use book value in investment decisions?

Q8: What do you think of the use of book values in making investment decisions?

(note: the following two paragraphs seem to be repeated in the tone of others, so the language structure is paraphrased, and the meaning between the two paragraphs is not very coherent. )

Book value actually played no role in Berkshire's investment decisions. Their pursuit of high-return businesses usually results in companies with smaller account values. He added that if the amount of money managed is small, book value may work better, just like Graham's company, and it works very well for practitioners like Graham, such as Buffett's friend Walter Schloss--. Graham's three most important ideas in his book "Smart investors" are: 1) what attitude investors should take towards the market; 2) the margin of safety; and 3) treat the company as a business rather than a stock.

Book value is virtually not a consideration in investment decision-making at Berkshire. Their pursuit of high return businesses usually leads to companies with minimal book values. He added that the book value approach could work well with small sums of money, like Graham had managed, and that the approach had worked well for Graham-type practitioners like Buffett's friend Walter Schloss. The three most important concepts conveyed by Graham in "The Intelligent Investor" were the investor's attitude toward the market, the "margin of safety", and the practice of looking at companies as businesses, not stocks.

Charlie Munger's view is that "predicting stock prices is not good, but harmful." In general, people who provide predictions tend to benefit from achieving such predictions. Their predictions often get "correct" results, but such correctness is extremely deceptive. Buffett added that they never predict the business or equity they are interested in in mergers and acquisitions. "it has become a common practice to first consider whether what the company's executive or board of directors is doing is reasonable. "

Munger proffered that "projections generally do more harm than good, and are usually prepared by persons who have some sort of an interest in the outcome of actions based on the projections. They often have a precision that's deceptive. "Buffett added that they've never looked at a projection in connection with an equity or business that they've acquired. "It's a ritual to justify doing what an executive or a board wanted to doin the first place."

Q9: if you do not contact management, do not read the annual report, do not know the stock price, but only look at the financial statements, which indicator will you pay attention to?

Q9: If you can't talk with management, and can't read the annual report, and didn't know the price, but could only look at the financial statements, what metric would you look at?

Answer 9: Buffett:To invest is to give you the right to use your existing funds in order to get more cash in the future.Let's put the price aside. If you want to buy a farm, you will first consider the unit output of the farm-at this point you are focusing on the asset itself. You will ask yourself: do I have enough experience in running a farm that the useful information provided by its current operating condition can predict its future financial situation? I buy stocks based on the way you buy a farm.These stocks must belong to an industry I am familiar with, and if I can buy them at 40% of their intrinsic value, I have a sufficient margin of safety. If you don't tell me the nature of the business, the information that the report can tell me is very limited.We have bought a lot of securities and we have not met with the management of most of them.We just rely on our general understanding of the business to find what we are interested in in the statements.

A9:WB: Investing is laying out money now to get more money later on. Let's leave the market price out. If you were buying a farm, you would think about bushels per acre-you are looking to the asset itself. Ask yourself: do I understand enough about the business so that the financials will be able to tell me meaningful things that will help me to foresee the statements in the future? I have bought stocks the way you describe. They were in businesses I understood, and if I could buy at 40% of X, I'd be okay with the margin of safety. If you don't tell me the nature of the business, financial statements won't tell me much. We've bought many securities, and with most, we've never met management. We use our general understanding of business and look to specifics from financial statements.

Munger:One indicator (cash) is very popular, and we love businesses with a lot of cash.On the contrary, you don't like a business with a lot of construction equipment, and your profits lie in the yard after a busy year. We will try to avoid getting involved in the latter kind of business. We prefer a business that can write us a check at the end of the year.

CM: One metric catches people. We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year.

Buffett: if we know the location of an apartment, we can know the value of the apartment, and we will know the monthly cost of owning the apartment. I have bought a lot of companies with financial difficulties, but there are some companies that I will never buy, even if they have the best management team in the world, because in a "bad" industry, a good management team doesn't make much difference.

WB: We could value an apartment if we knew where the apartment is, and we know the monthly checks. I have bought a lot of things off the financials. There is a lot I wouldn't buy even if it had the best management in the world, as it doesn't make much difference in a bad business.

Q10: when you evaluate a business, what do you think of its growth?

Q10: How do you think about growth rates when you value businesses?

If a business[Long term]The growth rate is higher than the discount rate, and its value is unlimited mathematically. This is the St. Petersburg paradox proposed by Durand 30 years ago. (the original link address is provided here, and Maubson's article, "two understandings from the St. Petersburg Paradox", is recommended.) that's how some managers know their company. It is dangerous to assume that there is no limit to growth-a lot of the trouble comes from it. It is expected that unusually rapid growth will continue to cause investors to lose a lot of money in the long run. Looking back at the excellent enterprises 50 years ago, how many can maintain a growth rate of 10% for a long time? For those enterprises with growth, those that can achieve a growth rate of 15% are even more rare.Neither Charlie nor I is willing to predict that the company will grow rapidly in the long run. Sometimes we may be wrong, this kind of mistake can also bring losses, but we like this kind of conservatism.

When the[Long-term]Growth rate is higher than the discount rate, then[Mathematically]The value is infinity. This is the St. Petersburg Paradox, written about by Durand 30 years ago.[Click here for a copy of the original 1957 article. For more on this topic, I recommend Integrating the Outliers: Two Lessons from the St. Petersburg Paradox, by CSFB's (now Legg Mason's) Michael Mauboussin.].Some managements think this[That the value of their company is infinite]. It gets very dangerous to assume high growth rates to infinity-that's where people get into a lot of trouble. The idea of projecting extremely high growth rates for a long period of time has cost investors an awful lot of money. Go look at top companies 50 years ago: how many have grown at 10% for a long time? And[Those that have grown]15% is very rarified. Charlie and I are rarely willing to project high growth rates. Maybe we're wrong sometimes and that costs us, but we like to be conservative.

[Munger: if you use a growth rate that is so high that you get unlimited enterprise value, then you should use a more realistic growth rate. What else can you do?]

[CM: If your growth rate is so high that you conclude the business has an infinite valuation, you have to use more realistic numbers. What else could anyone do?]