HOW TO THINK LIKE BENJAMIN GRAHAM AND INVEST LIKE WARREN BUFFETT

C h a p t e r 9
YOU MAKE THE CALL
Abusiness is worth the present value of the future cash flows it
generates from now until doomsday. Present value is in the eye
of the beholder, for its realization is entirely in the future. People
will disagree at virtually every step of the process of figuring present
value, including the methods used and the different answers they
yield.
Gazing into the cloudy crystal ball of valuation, you can never
be sure of the accuracy of forecasts when you make them. Yet since
your future wealth is at stake, you do not want to fly blindfolded
even if you cannot predict the future. What you can do is minimize
the hazards of your errors.
What drives cash flows are assets and earnings. These factors
andhistorical cash flows are the best gauges for thinking about probable
future cash flows. You couldfigure value basedjust on assets
(something calledbook value), basedjust on earnings (what the
earnings stream is worth), or from the cash flows (the worth of the
dividends paid out to shareholders).
However, none of these separate valuation tools in itself is usually
sufficient to determine the value of a business. Not only is none
of them definitive, all of them together remain imperfect, for all
share the inevitable andirremovable infirmity in any valuation exercise:
using current andpast information to forecast future cash
flows. You’ll needinformation about all these things to aidyour judgment.
Some valuation tools are more useful for certain businesses than
for others. For example, GE generates earnings andpays cash dividends,
Microsoft generates earnings but does not pay cash dividends,
andAmazon.com does neither. Obviously, you can value all three
companies by using asset measures; you can value GE andMicrosoft
basedon earnings, andGE basedon dividends.
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