Price is what you pay, value is what you get
Identifying a strong Indian 'franchise' is one thing and valuing and investing in it is another. Even the best 'franchises' bought at expensive valuations will not do the trick. So how does one value a 'franchise'? Mr. Buffett has this to say on valuations.
He says: "The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds."
The technique Buffett has mentioned about is also popularly known as the discounted cash flow, or the DCF.
Image: Employees of an exchange bureau count US dollar currency notes at their office in New Delhi. | Photograph: Prakash Singh/AFP/Getty Images
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