I used to be skeptical when Buffett said he never used spreadsheets, or math above basic algebra to valuate a company and that he performed all of his calculations in his head or on paper. After researching and watching videos of Li Lu and Pabrai going through quick valuations in their head I realized that it is in fact true. They use the valuations as filter to determine if they need to look further into the company. It usually takes about 60 seconds. If the numbers don’t pop out at them as a complete no brainer then they move on. This allows them to filter through thousands of stocks.
Munger: “Warren talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”
Buffett: “It’s true, If{the value of a company} doesn’t just scream out at you, it’s too close.”
Here are some examples of Buffett’s, Pabrai’s and Lu’s quick, no brainer valuations of companies.
Atled
Price: $29k/share
Cash: $20k/share
Eps: $11k
Buffett borrowed money to buy it, considered it a cigar butt
Dahon Flour(Korean stock)
25% Flour market share
Price: 35K won
Last 3 year earnings: 18-25K won
Cash and investments: 100K won
Buffett 2006 Korean Booklet
PetroChina
Intrinsic Value(per Buffett): $100B
Price: $35B
Buffett 2002 put $488M sold in 2007 for $4B($278B market cap) paid $1.2B in taxes
Washington Post 1973
Intrinsic Value per Buffett and Private Equity Firms: $500M
Price: $80M
Disney 1966 Bought 5% @ $80M valuation. He valued it at $300-400M
Western Insurance
Price: $3-13 the past 52 weeks
Eps $22 two years prior, $29 one year prior
BV/share: $135
Buffett 1951 flipping through thousands of Moody’s manual pages.
Fiat Chrystler
Price $5
Expected to earn $5/share in 5 years
Pabrai 2013
Fiat Chrystler #2
Price: $14
Expected to earn $7/share in 5 years
Expected to have $14 cash/share in 5 years
Pabrai 2018
Ipsco
Price: $45
Cash/share: $15
Expected to earn $15 ever year during the next 2 years.
Pabrai early 2000’s
Rain
Price: $200M
Expected earnings in 2-3 years: $200M
Pabrai 2015
Sunteck:
Price: $200M(US dollars)
Backlog: $500M from one project, had 24 other projects.
No debt, had tangible assets in apartments, land etc.
Here’s Li Lu going through the process. Skip to 21:00 & 46:00
https://youtu.be/lot9BnFgO3k
What struck me as interesting was a video(ten commandments) of Pabrai doing a DCF model in his head for Apple. He gave it the benefit of the doubt and assigned it a cheap valuation of PE10. After doing some quick math in his head he came to the conclusion that there are much better deals out there. When he was informed that it was actually at PE16 he replied “ouch.” Buffett is invested in Apple only because he is confined to a 100 public stocks that he can invest in. I highly doubt he would own it if he had lesser sums of money to work with. Imagine, Apple selling at PE10, in all of its glory with its moat, stickiness, subscriptions, management, balance sheet and there is still not a big enough an upside for Pabrai. This taught me to be unreasonably unreasonable with your selections.
I’m guilty of continuing to use the DCF model here and there as I can’t help myself, plus, there are times I don’t know how to valuate a company without it. But I realize I’m making my life more difficult/complicated and should take a pass. Human nature is so quirky.
The Rational Cloner 