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 and 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.
Buffett's formula is to just divide the owner's earnings for the current year by the discounting rate and the discounting rate he uses is the rate on long term US govt bonds.
So on one hand, Buffett 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 two things (using a low discounting rate but also not assuming any growth) cancel each other out and 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.