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Warren Buffett has a unique approach to stock investing that has made him one of the most successful investors of all time. Simply put, Buffett’s strategy is to buy businesses at prices below their intrinsic value.
How do you do it? Berkshire Hathaway Does the CEO assess intrinsic value? As Buffett himself says:
If you try to evaluate intrinsic value, it is all related to cash flow. The only reason to put money into any investment right now is because you expect to withdraw money. Not by selling it to someone else, because that’s just a game of who wins, but rather what the resource produces. It’s true if you’re buying a farm, it’s true if you’re buying a business.
As Buffett sees it, the intrinsic value of a business has nothing to do with what the future share price will be. Instead, the business only generates cash.
Revenues
Take it Apple (NASDAQ: AAPL ) as an example. The company generated $6.05 per share this year, which is forecast to grow to $6.90 per share by 2024.
For Buffett, the intrinsic value of Apple shares has nothing to do with what the stock price will be in 2024, or what the price-to-earnings (P/E) ratio will be. Rather, it is only about how much the company earns.
Apple stock now trades at $157. According to Buffett, if the company makes $6.90 in 2024, the return for an investor buying the stock today will be 4.39 percent that year.
Importantly, it has nothing to do with whether the stock price is $140, $160, or $190. That’s who wins for Buffett, not invests.
A stock I am buying.
Simply put, Buffett tries to calculate the intrinsic value of a business by comparing its future cash flows to its current value. In doing so, there is now a stock that clearly stands out as a bargain for me.
That’s stock. Meta forums (NASDAQ: META ) is a stock I hold in my portfolio and I think the shares are currently undervalued.
It is currently part of the company’s risk reality lab. Last year, Meta spent around $10 billion on its Metavase business, and it’s only a matter of time before that investment pays off.
In my view, however, the current share price more than justifies the risk. Despite significant leveraged spending, the company generated $35 billion in free cash last year.
What do you mean by Buffett’s standards? It’s a return of about 8%, which I think is attractive given interest rates below 3%.
Its total business value is currently just under $438 billion. But the company has $16.6 billion in cash and $13.9 billion in debt.
That values the entire business at around $435 billion. On top of that, $35 billion in annual revenue seems solid to me.
Stock prices can go anywhere, but that’s not how Warren Buffett thinks about his investment returns. Despite the high capital costs, MetaPlatforms generates huge amounts of cash, which is why I buy shares at these prices.