In May of 2007, as the markets were reaching new records (and moving closer to a bear market precipice and the financial crisis), Warren Buffett and Charlie Munger were discussing intrinsic value at the annual Berkshire Hathaway conference. The decade-long run for the current bull market and widespread concerns about elevated values in U.S. stocks leading to days like Tuesday, when the Dow Jones Industrial Average fell by close to 800 points, are reminders that getting at the true value of corporations is as important as it has ever been.
The concept of intrinsic value came up earlier this year when Buffett made the decision to change his trigger for buying back Berkshire shares from a quantifiable discount to the company’s book value (1.2 times book value) to a discount to intrinsic value. In moving back to monitoring intrinsic value, Buffett invoked the method also used by J.P. Morgan CEO Jamie Dimon.
As buybacks across the corporate sector continue to reach new records, it becomes more questionable whether all of these companies are basing their share repurchases on a valuation metric that uncovers a discount in a stock’s trading price to intrinsic value — or are just buying back stock to keep shareholders happy and prop up earnings. Jamie Dimon said on Tuesday at a Goldman Sachs conference that buying back stock when market prices are high is not a wise idea, and companies should be reinvesting in the business instead.
Now the issue of valuation isn’t limited to buyback analysis. As many sectors within the S&P 500, including one of Buffett’s favorites (banking) are in correction, every investor should be questioning the value of what they own in their stock portfolio.