Buffet says "Appropriate Discount rate". what is Appropriate depends upon individual. Bigger the Discount rate, lower the Intrinsic value, lower the buy price. So it's very important to select appropriate discount rate.

Originally posted by basant Take Cost of capital as 11%(Risk free rate + Premium). Now this is debatable because finding the beta for every stock is not easy so tale a 11% or thereabout number!

That's right Basant ji. Your argument seems perfect.

unfortunately i do not understand Risk free rates & premiums, so i take Highest Inflation number as IRR. My returns should not be eaten by Inflation. So I consider 12% better than anything else.

Hi Kishore,
        Here's my personal opinion on Intrinsic value calc. As Basantji rightly said, it is future FCF discounted to present. I agree that it is typically difficult to project cap ex into the future. But this is quite possible when one knows a company intimately enough. I don't have that much knowledge about any individual company yet, bt feel that I have a reasonable handle on projecting capex for some of oldest holdings. For new investments I typically just use the ROE % to project future earnings. ROE typically acts as a conservative figure for companies that have low or zero debt at present. If they want to grow faster than ROE then they can pile on debt. So, to start with I pick companies with low or zero debt and then project using ROE for my new investments. Since there is possibility of higher error in these simple projections, I apply atleast a 30% margin of error to my intrinsic value calcs. Though I calculate growth based on ROE, I also calculate an intrinsic value assuming zero growth. I then try to wait for companies to reach this zero growth number. It is usually not easy to get companies at zero growth number, but crashes like the one we just experienced typically get these companies close to that number. I must confess though that sometimes I get tempted or tired of the wait and jump in when the prices reach the ROE based intrinsic value:)

For rate of return I usually take 8-10% depending on the interest rate scenario. I have gone up to 12% when bank FDs where giving around 12% about a year back. My theory is to get a return that is atleast equal to FD return. Since I typically wait for the 'almost zero growth' intrinsic value situation till I invest, I have consistently and easily bet FD return rates by a good margin. But still I like to be very very conservative in my new investments. Plus, I must add that I usually invest in good dividend yiled stocks, and dividends add more cream to my 'returns' cake:).

Hope this helps.

Hi Subu,
    Good point. My gut feel too is that they are macro calls. But I guess RJ has had a history of success on macro calls. He apparently also has friends 'at the right places' (read inside) to give him a better feel for company, sector etc. Does anyone know at what average P/Es did RJ acquire CRISIL, Titan etc at?