I was read the book "The Buffett Way".
The book claims that Warren Buffett uses a simple calculation to calculate the intrinsic value of a company.
The regular way is to estimate future earnings & then use a discounting rate to calculate the present value of the free cash flow. The discounting rate is typically one higher than that you receive for fixed income instruments - called a Beta - a premium.
Buffet's formula is to just divide the owner's earnings for the current year by the discounting rate & the discounting rate he uses is the rate on long term US govt bonds.
So on one hand, Buffet uses a low discounting. But on the other hand, he doesn't use future earnings - i.e. that may mean that he isn't accounting for any growth in earnings.
I am wondering if these 2 things (using a low discounting rate but also not assuming any growth) cancel each other out & help him arrive a decent rough estimate? Is there any mathematical justification to this? The cancelling is my assumption - the book doesn't say anything about why he uses a low discounting rate.