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I have a bit of difficulties to understand how Warren Buffett utilizes the 10 years treasury bond to evaluate the intrinsic value of a stock. I did some calculations using the Discounted Cash Flow, but it doesn't seem to make sense to me using the 10 year treasury bond. Can you elaborate on how Warren Buffett uses it?

EDIT

I used this website https://stablebread.com/how-to-calculate-the-intrinsic-value-of-a-company-like-warren-buffett/ to calculate the intrinsic value using the 10 year treasury bond, but I got some very unrealistic output. For instance, the META stock price is currently near 134 USD, but my valuation is 901.43 USD using the method presented in the website.

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EDIT 2

This is a picture how they determined the terminal value in the website:

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    It would be helpful if you could link to something that describes the calculation you are trying to make or show the calculation you made and explain what doesn’t make sense. My guess is that you read something saying to calculate the present value of cash flows using the treasury as the discount rate. But that’s just a guess and I have no idea why that calculation wouldn’t make sense to you.
    – Justin Cave
    Oct 17, 2022 at 6:39
  • "it doesn't seem to make sense to me using the 10 year treasury bond" do you mean you don;t understand why you would use the 10-year treasury bond to do the calculations or that the results of your calculations don't make sense using that value? Do they make sense using a different treasury yield?
    – D Stanley
    Oct 17, 2022 at 14:19
  • I modified my question
    – J.Doe
    Oct 18, 2022 at 11:24
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    OK. Thanks. And where are your numbers coming from? It looks like you're projecting that Meta's free cash flow would increase by 10% annually forever? If so, then yes, that would produce a very, very high valuation. That's probably not a realistic assumption for a company of Meta's size though.
    – Justin Cave
    Oct 18, 2022 at 12:15
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    I'm not sure how you're determining the terminal value. But if you assume a rate of growth forever that is 2-3 times your discount rate, you'd expect to end up with a very high valuation. That's the nature of the math. Realistically, an investor in growth stocks wouldn't use the US treasury rate as their discount rate, they'd demand a much higher discount rate to compensate for the risk of growth stocks. And Buffet wouldn't invest in a company like Meta, he focuses on mature companies.
    – Justin Cave
    Oct 18, 2022 at 12:51

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My experience of analyzing Buffett's strategies leads me to the conclusion that he uses very broad, easy to calculate metrics to quickly evaluate a company (going deeper as he gets more interested in making an acquisition). He may not spend too much time worrying about using the best discount rates (i.e. using rates along the yield curve depending on the length of time of the discounting) but just takes a basic rate (the 10-year yield) that has at least some economic relevance, since the valuation is based on future cash flows that presumably will last at least 10 years.

I don't think the discount rate is your big problem here, though. Looking at your numbers, even with a 10% discount rate, the valuation would still be about $400 per share. You seem to have different assumptions about future stable growth, or maybe even the assumption that META will live in perpetuity than the market does. It's also possible that the FCF estimates are way off.

Even so, the 10-year rate might not be appropriate for META, since it is a higher-risk tech company. But there's not one measurement that can be used in isolation; Buffet had many metrics to find "cheap" companies than can give very different results. I cannot speak to how Buffet would value it; only what I have learned about his broad measurements.

Also, look at this quote from the page you linked:

And when Charlie and I felt subjectively that interest rates were on the low side – we'd probably be less inclined to be willing to sign up for that long-term government rate. We might add a point or two just generally. But the logic would drive you to use the long-term government rate.

Back to Buffet - his strategy was not to find stocks to passively invest in; his strategy was to look for companies that he could acquire at a steep discount and manage in a way that would improve its financials to what he thought they should be. He might use the 10-year rate (maybe plus a point based on his quote) to do a very rough valuation, look at it, and determine that the valuation is crap and ignore it, or do a different valuation that makes more sense.

It's akin to buying real estate cheaply in order to flip it, not just to buy a developed lot with the hope that it appreciates in value naturally.

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