Intrinsic Value Discipline

We test every investment with IRR over 10–20 years, earnings yield on cost, EPS growth, and margin of safety.

What Is Intrinsic Value?

Intrinsic value is the present value of all the cash flows a business will generate over its remaining life, discounted at an appropriate rate. It is not a precise number — it is a range, and honest investors acknowledge that range.

Our goal is to buy businesses at prices significantly below the low end of that range. When we get this right, the investment succeeds even if our estimates were somewhat optimistic.

The Tests We Apply

Before investing in any business, we apply a set of quantitative tests designed to verify that the price we are paying is appropriate relative to the value we are receiving.

IRR Over 10–20 Years: We model the internal rate of return we expect to earn over a long holding period under different scenarios. We require that the base case delivers an IRR that compensates for the risk and the opportunity cost of the capital.

Earnings Yield on Cost: Dividing normalized earnings by the price we pay gives us a yield that we compare to alternatives including bonds, real estate, and other equity investments. We require a yield that reflects the quality of the business and the duration of our holding period.

EPS Growth: We analyze the historical and projected growth in earnings per share, adjusting for share issuances, buybacks, and one-time items. Sustainable EPS growth is the primary driver of long-term investment returns.

Margin of Safety: We apply an explicit discount to our estimate of intrinsic value before buying. This cushion absorbs errors in our analysis, unexpected deterioration in the business, or changes in the macroeconomic environment.