luutzu,
I saw the video and it was interesting to read how Buffet looks at historical earnings and then simply applies his 15% required return, and does not do forecasts, with this being negated by buying with a margin of safety.
With earnings, or normalised earnings, are you using NPAT for this?
What about "owner's earnings" as described by Buffett?
I forgot what Buffett said, exactly, regarding owner's earnings... But I take it to mean the earnings that belong to the investor, the owner, after all expenses - taxes, depreciation, interests and the likes.
It's better to answer with a specific example to illustrate, I'll try to do that in a couple months time when I can go from start to finish... That way we can have a good laugh at my understanding, haha...
but in general...
A company's Earning Power can be found from its Financial Performance (the NPAT) or its statement of Cash Flow - it depends on the nature of the business. What it depends we get to, but it's worth noting that it's not just a simple reading of the reported NPAT or FCF or Net Operating CF... you got to understand the business, how it make its money, what are its general expenses and income (cash generating cycle)... from these you can make certain adjustments to get to the earning power.
The reported profits can be muck around with, cash flow is harder to play around using accounting gimmicks. So in general, I found that a good company might not report high profit, but you can see its real performance by looking at its operating cash flow. Take that Net operating cash flow, deduct net capital expenditure (the costs to repair/replace properties, plants and equipment)... This delay paying income tax, and trails, the reported profit.
However, I've seen in property/real estate companies like Australand... where they report negative operating cash flow.. .looking at the notes and you'll see that for such a business, its normal operation is buying land and properties, to then develop and build... So over a 12 month period, chances are it can't turn operating cash positive on this operation... but it reports positive profit. (I bought ALZ based more on its book value than on its earnings... so it all depends).
------
But as VC and RY said in their posts, a lot of assumptions and a thorough understanding of the business have to be made before we can get to the valuation.
I literally look at some 50 charts, around 200 to 300 variables, over 8 to 10 years before I get to the valuation stage. But before that, I do a rough estimate to see if I need to even bother doing all that...
I take a quick look at its financial position - can it keep the lights on in the foreseeable future; are its margins - profit margin I think above 8% is OK, as long as it's consistent; the higher the better but 8 or 10 is acceptable.; its return on Equity, investments... I break down the components of ROE to see what contributes most to it.
So I make an assumption that if this company actual earnings is its reported earning, is its current price too high or could be interesting to look further...
I think Buffett's advice to start from company A and go to Z, of businesses you can understand... that's a better approach then first looking at the market price. But point is there is a lot to look at before you ought to look at the valuation.
I found that in reading the Annual reports, starting at the earliest year you think is relevant, then make notes of their comments, strategies, then type in the financial figures... by the end of 8 or 10 years I pretty much know how honest the management is, know how able they are, know how the business is and it get pretty easy to determine an acceptable range of value... I could still be wrong but I'd be comfortable and could make contrarian decision a bit easier than otherwise.