Question
The 'owner earnings times ten' formula is a key component of Warren Buffett's approach to value investing. This formula is used to determine the valuation of a company for investment purposes. According to Buffett, owner earnings, which is the cash flow left to shareholders after all operational expenses and taxes, is the most relevant item for valuation. By multiplying this figure by ten, investors can get a rough estimate of a company's intrinsic value. This method helps investors identify undervalued stocks where the market price is less than the intrinsic value, which is a fundamental principle of value investing.
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The formula is simple: owner earnings times ten. In his 1986 letter to shareholders, Buffett is characteristically blunt, calling owner earnings, "the relevant item for valuation purposes—both for investors in buying stocks and for managers in buying entire businesses." Buffett notes in his 2014 letter that while real estate deals with a ten cap are pretty rare, they are much more common in the stock market, where traders react to short-term emotions like fear and greed and drive prices down.
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