Warren Buffett places a strong emphasis on a company’s intrinsic value in determining whether the company should be purchased in whole or in part. Whether a company is undervalued or overvalued is at the heart of knowing whether it is a good investment. The same applies to the stock market as a whole.
So, is there a straightforward formula that you can use to determine valuation? Not according to Warren Buffett.
“It’s not reducible to any formula where you can actually put in the variables perfectly,” Warren Buffett explained at the 2017 Berkshire Hathaway Annual Meeting. “It’s just not quite as simple as having one or two formulas and, then, saying the market is undervalued or overvalued, or a company is undervalued or overvalued.”
As he noted, you can have a formula, but the hard part is knowing what variables to put in.
Warren Buffett’s full explanation on determining valuation
See the complete Lessons From Warren Buffett series
© 2020 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.