Now that we have the introduction to valuation out of the way (and the random thoughts on mean reversion and R&D capitalization), it’s time to move onto the concept of intrinsic value. Intrinsic value is a concept that is thrown around a lot in finance, especially the value investing niche. However, while the concept is thrown around like a frat bro yelling out YOLO every 5 minutes, it’s never clearly defined for those who are new to the game. Hopefully this session clarifies it a little bit and gives you an idea of what intrinsic value means and how you start going about calculating it. The actual calculating will come in later sessions and this one will just give you an idea of how to go about setting up the framework to estimating intrinsic value later on.
Berkshire Hathaway is a bit of an anomaly when it comes to conducting a valuation of the business. On the one hand, it is an incredibly complex, and often times secretive, operation where getting exact details of quantitative data can be incredibly difficult. For example, if you peruse the annual reports or 10Ks, the income statement will be presented in a very general sense but not provide details on each individual business unit. However, on the other hand, Warren Buffett has dropped a ton of hints along the way in his annual letters on what he believes is the intrinsic value of the business. Seeing as the most recent annual report has recently come out, Berkshire is on my mind. So let me give you an introduction on how to do a quick and dirty calculation to figure out the intrinsic value of Berkshire Hathaway.