I thought he was trying to say something profound (which escaped me) when all he was attempting was to state the obvious.
I think it is quite profound. And I think there are plenty of people out there who don’t understand it, so it is not so obvious (or perhaps we have to ask, “obvious to whom?”)
One insight I think has a lot more power than I have extracted from it: consumer surplus. When I buys something from B, generally the thing has two values that are important because the value of something is not the same to everybody. In an efficient investment market this is way less obvious because there is a sort of consensus on how to value investments. But still, on the day you sell me a share of BRK.B, that share is worth less to you than it is to me, and its price that day is between our two valuations.
Even in the case of investments, DCF is the value, right? But at what discount rate? And who’s prediction of future cash flows are we using? And how do we deal with the FACT that the future is always uncertain (at least until it becomes the past)? Buffett uses relatively low discount rates but demands a margin of safety, which means compared to people who use higher discount rates, Buffett is likely to be a buyer of things with greater future payouts and lesser near term payouts. This is just math, lower discount rates value future earnings much more highly than higher discount rates.
So every trade, investment or not, reflects a different value of the traded asset to the seller and the buyer. I guess it could be that the biggest cause of difference in valuation is error on the part of at least one of the parties to the transaction, but there is also an input to using different discount rates and margins of safety in valuing assets that can produce a difference. Presumably as a Saul investor I am using a higher discount rate and a lower margin of safety in my trading than those selling me Saul stocks so they can buy value stocks.
Another consideration, if I buy a Saul Stock tuesday and sell it 3 weeks later for 20% more than I bought it for, then the cash flows turned out to be an outflow of Price on tuesday and in inflow of 1.2Price 3 weeks later. At most reasonable discount rates, selling it for 1.2Price so soon discounts to pretty close to 1.2*Price on the day I bought it for Price. DCF doesn’t tell you the cash flows have to arise from the business operation or decisions by the company to pay dividends. All it says is cash has to flow. I think it is fair-ish to define the Business Value as the DCF value to someone who holds the stock forever, and that this is a very relevant consideration in attempting to predict what even stock trades might yield in terms of cash flows.
I don’t even know how we are supposed to determine our discount rate. Do we rank order the IRRs we are offered in the market, and then our discount rate is the lowest IRR we buy before we run out of cash?
Anyway, none of this seems obvious to me, and certainly not obvious to many participants in the market. A ton of casual participants don’t even seem to think it is relevant that stocks represent ownership of a business, their entire consideration is are people saying it is going to make you money or not?