AUDIENCE MEMBER 00:08
Hi, my name is Jason Tang (PH) from Traverse City, Michigan. Before I ask my question, I want to know that it’s true that you guys are going to be here tomorrow at 9:30 to answer more questions. (Laughter)
My question, I just recently read the book, “Quest for Value,” by — I think the author is Bennett Stewart, from Stern Stewart consulting firm.
And I want to talk to you a bit about — just ask you about different valuation methodologies, and EVA in particular, and how that may or may not be more valid than, let’s say, other benchmarks of value, like P/E, or price-to-book, or price-to-sales.
Is that something closer? I noticed that the language that was used in this book was real similar to the type of language you guys use in your writings. So I’d like you to talk a little bit about EVA, if you could.
WARREN BUFFETT 00:51
Charlie, why don’t you take EVA?
CHARLIE MUNGER 00:55
I think there’s an awful lot of twaddle and bullshit. (Laughter)
WARREN BUFFETT 01:01
I knew that’s what he was going to say. And I thought it deserved it, so I — and I didn’t want to say it myself.
CHARLIE MUNGER 01:11
In EVA, we keep stating, over and over again, that the game is to turn the retained dollars into something more than dollars.
And EVA tends to incorporate cost of capital ideas that just make no sense at all. They make it sound very fashionable.
And, God knows, it’s correct that a corporation that earns a huge return on capital and keeps retaining it for a long time has a great record in terms of EVA. But the mental system, as a whole, does not work. It’s like medieval theology. (Laughter)
WARREN BUFFETT 02:16
I like that second term better than the earlier one. (Laughter) Number 2.
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