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As one might imagine, one of the questions that Buffett most often gets is *how to calculate intrinsic value*. Every time he is questioned, his reply often seems vague and abstract. Some have even gone so far as to ask for precise models with concrete examples. Funny enough, the answer is always the same. Most of the time, he ends up mentioning Aesop’s tale of the birds in the bush.
Aesop’s fable, dating back to around 600 BCE, teaches the reader the importance of choosing the bird that’s already in the hand, versus the two possible hares that are hiding in the bush.
After over 2,600 years, Buffett takes it a bit further and asks: how likely is it that there are two hares in that bush? How long could it take until I have those two hares? The whole point of investing is to forego an already-caught hare for two in the future, given the very serious constraints of risk and the time value of money.
# The precision trap
How do we apply this in the actual investing world? As in most cases, we are assured of our thesis when we can find a possible explanation provided by quantitative values; in fact, most people attracted to finance are individuals who were pretty “good with numbers”. It is assuring to build a complex discounted cash flow model that spits out a precise value for the stock.
Alas, how disappointing it is to find out that one of the most successful duos in the history of finance do not endeavor into deep mathematical, calculus, or algebraic calculations to reach their results. In fact, a even larger circle of successfull investors (investors of Graham-Doddsville) were also quite alergic to exact sciences.
>“Some of the worst business decisions I’ve seen are those that are done with a lot of formal projections and discounts back. It seems that higher mathematics with more false precision should help you, but it doesn’t.” Charlie Munger
Their claim is often that you just need basic math knowledge for profitable investing. No complex discounted free cash flow models, no spreadsheets, and no Greek alphabets.
It should be noted that Buffett always adds, almost as if choreographed, that the intrinsic value of a business will always be the discounted cash flows of all future earnings of the company until the end of its lifecycle. Similar to a bond, but without any printed coupon amount. This is the same understanding presented by John Burr Williams in his book *The Theory of Investment Value*.
**Their basis is simple, yet hard to execute:**
1. **Don’t calculate a precise value;** calculate a range and ensure it is sufficiently above the current market cap.
2. **Don’t try to quantify risk (much less with Beta)**; if you aren’t confident in the company’s future cash flows, don’t bother trying to value it at all.
3. **Ignore the academic jargon**: No WACC (Weighted Average Cost of Capital) and no CAPM (Capital Asset Pricing Model).
Source: [https://medismarketnotes.substack.com/p/aesop-birds-and-intrinsic-value](https://medismarketnotes.substack.com/p/aesop-birds-and-intrinsic-value)
More details is available directly at the source link.
No AI was used to write this.