Warren Buffett talks about intrinsic value all the time, but he’s never once handed investors a neat little formula. In fact, if you read through his letters or watch his interviews, you’ll notice he explains the idea beautifully—then leaves the math up to us.

According to Charlie Munger, Buffet’s business partner:

“Warren often 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.”

So what does Buffett really mean when he talks about intrinsic value? And how close can we get to the way he actually thinks about it?

In this post, I’m going to pull together Buffett’s clues—his comments about owner earnings, discount rates, and simplicity—to build a practical formula that any investor can use. Then we’ll put that formula to the test. Because as Buffett likes to remind us, it’s better to be approximately right than precisely wrong.

Owner Earnings

The first things we need to calculate is the owner earnings for our company. As I have explained in a few articles previous, this is how Buffett looks at free cash flow.

This formula adds things back in such as depreciation, changes in working capital and such. Buffett feels that this more accurately reflects the actual cash flow that an owner receives.

For a refresher on the formula, here we go (1986 Annual Letter to Shareholders):

Owner Earnings = (Net Income + Depreciation, Depletion, and Amortization + Change in Deferred Tax – 5yr Average of Maintenance Capital Expenditure + Change in Working Capital)

You will find all of these items in the cash flow statement of any public company.

Buffet’s Thoughts on Discount Rates

The next big component of a discounted cash flow is the discount rate.

There are several ways to go with discount rates. You can use the “traditional” method of calculating discount rates using the CAPM models and beta, which is what I first cut my teeth on learning discounted cash flows.

Or you can try the Warren Buffett approach of using discount rates based on a long-term government rate. In short, Buffett and Munger prefer using the long-term government bond rate for stable, low-growth businesses—exactly the kind they favor.

So, what do we do now? Keep in mind that this was stated during the mid-90s when interest rates were quite a bit higher than during the 2010’s.

To illustrate this look at the monthly breakdown of the 10-year Treasuries rates in 1996.

• Jan 96  5.65%
• Feb 96  5.81%
• Mar 96  6.27%
• Apr 96   6.51%
• May 96  6.74%
• June 96  6.91%
• July 96  6.87%
• Aug 96  6.64%
• Sep 96  6.83%
• Oct 96  6.53%
• Nov 96  6.20%
• Dec 96  6.30%

That works out to an average of 6.44% for the year in 1996. Compare this to 2018.

• Jan 18  2.58%
• Feb 18  2.86%
• Mar 18  2.84%
• Apr 18  2.87%
• May 18  2.98%
• June 18  2.91%
• July 18  2.89%
• Aug 18  2.89%
• Sep 18  3.00%
• Oct 18  3.15%
• Nov 18  3.12%
• Dec 18  2.85%

The chart yields an average of 2.70%, which is quite a change from our rate from 1996. The differences certainly illustrate the difference in the rate environments of the different eras.

The current 30-year treasury bill rate is 4.25%, as of January 2026.

So which way do we go? For this exercise, we are going to use the average from 1996 as our starting point of 6.44%.

By doing it this way as opposed to the “traditional” way, it helps to eliminate all the calculations for beta and CAPM, which can be quite laborious and confusing to new investors just starting.

Buffett being Buffett, he always tries to go for simple as opposed to complicated. That is part of his particular brilliance and what one of the traits that make Buffett the finest investor of our generation.

Which one do we use then?

The discount rate from 1996 or today? I am going to use the rate that he would have used during 1996 to get an idea of whether those rates would work.

I think they will.

We have two other rates to discuss, the first being our growth rate that we believe the company will continue to grow over our ten-year period.

Based on our previous discussion about growth and free-cash-flow, we can look at the growth of our owner earnings over the last ten years and extrapolate a growth rate over that time.

One of the things about working with earnings and averages is that they are not always accurate. We will have to use estimates from time to time. The trick is not to go crazy and overestimate. In our case when we figure
out what the terminal rate is going to be. We need our growth rate to be higher than the terminal rate or the formula will not work.

There are several ways to go with this portion of the calculations; you can either pick a number based on numbers that you pull from the annual reports.

Or you can use analysts predictions as well. I prefer to use numbers as I feel they have some sort of basis in reality and aren’t skewed by my prejudices towards the company, good or bad.

Next up is the terminal value.

The terminal value is the rate by which we think the company will be growing at the end of our ten years.

One thing to keep in mind is that this rate can not continue growing to infinity, as nice as that would be. A safe rate to use for our growth at the end of the ten-years would be the growth of our economy, the GDP.

According to tradingeconomics.com, the current GDP growth rate for the US as of January 2026 is 2.8%. So that is the number we will use to calculate our terminal value at the end of the DCF.

Putting it all together with an example

Now that we have gathered all the pieces we need and discussed the theories behind the pieces, let’s start to put this all together, shall we?

Let’s take a look at the owner earnings for 10 years for Oshkosh Corp (OSK); a time period spanning 2010 – 2018.

Next up we will calculate the discounted cash of the owner earnings. For our exercise we are going to assume a 3% growth rate as well as a 6.44% discount rate using the “1996” average from above.

Now that we have calculated our discounted cash flows we can look at finding the intrinsic value of Oshkosh Corp.

Terminal Value will include the Year 10 discounted owner earnings of $394.23 and the discount rate of 6.44% and a terminal discount rate of 2.8% of the GDP of the economy.

Therefore the Terminal value will equal $12,452.18

Next, we will discount this Terminal Value by 6.44% to get:
Discounted Terminal Value = $6,671.09

Lastly, we will put together the intrinsic value by adding the total of our discounted owner earnings and our discounted terminal value.

Intrinsic value = $3,292.62 + $6,671.09
Intrinsic value = $9,963.71

The final step is to calculate our per share data to determine whether the stock is “cheap” or not.

To do this, we will take our total intrinsic value and cash or cash equivalents and subtract long-term debt and then divide all that by the shares outstanding.

Pulling the numbers from the balance sheet of Oshkosh Corp we get:

Cash = $455
Debt = $818
Shares Outstanding = 73.1

Plugging the numbers into the equation.

Intrinsic value per share = (9,963.71 + (455 – 818)) / 73.1

Once calculating we get a per-share price of $131.34, as compared to a 2019 price of $71.24.

If our calculations are correct, this will give us a margin of safety close to 100%. Again this illustrates that the closer the discount rate gets to the terminal rate, the higher the valuation.

To me, this highlights the idea that using the long-term growth rates will work, until the rates drop as they have recently. As interest rates fall, valuations will rise.

For example, if we change the discount rate to a “2018” long-term rate of around 3% and keep all other numbers the same we get a value of $702.79. So, the closer the discount rate to the terminal rate the higher the valuations. That is why it is harder to find good values when interest rates fall, because the valuations rise.

If we use the cost of equity or WACC of 13.60% as our discount rate for Oshkosh Corp the value of the company would be $45.38. As you can see from the three discount rates, they matter greatly, and require a lot of consideration and thought.

Final Thoughts: Discounted Owner Earnings

One of the fun parts of doing these exercises is determining what to assume in regards to rates to us. None of know the future, so our best bet is to try to be conservative.

As witnessed by doing this exercise for Oshkosh Corp, if our growth rate is different, or the discount rates are different, then our number can change completely.

The above examples show the power of making estimates and basing our investment decisions on these estimates.

As a value investor, I prefer to go lower and try to be more conservative.

I think this post illustrates that the ideas that Buffett and Munger have both espoused have some merit and can bear some fruit.

Using discounted cash flows to help determine future intrinsic value is a great exercise to project into the future. But remember these are only projections and ONLY as good as the numbers we plug in.

Based on using the suggestions from Buffett and Munger it also helps us avoid using beta and the CAPE ratio which can be more difficult to calculate and lead to longer calculations. We can see that using rates closer to the long-term returns you expect to lead to more reasonable valuations.

Remember that Buffett’s mind is like a computer and he can spit these calculations out in his head, unlike us mere mortals that need to rely on spreadsheets. I agree with Buffett in that trying to keep things simple can help avoid mistakes of calculations as well as errors in judgment.

After all one of his favorite sayings is “that it is better to be approximately correct as opposed to precisely wrong.”

You are never going to get an exact number doing any of these models. The trick is to find a range of possibilities and determining whether those possibilities are correct.

I hope you enjoyed this dive into the minds of Warren Buffet and Charlie Munger; I know I sure have.

Please let me know your thoughts or if you have any questions.

As always, thanks for taking the time to read this and invest with a margin of safety, emphasis on the safety.

Take care,

Dave