From Warren Buffett at the 1995 Berkshire Hathaway Annual Meeting:
It isn’t a multiple of today’s earnings that is primarily determinate of things. We bought our Coca-Cola, for example, in 1988 and ’89, on this stock, at a price of $11 a share—as low as 9, as high as 13, but it averaged about $11.
And it’ll earn, we’ll say, most estimates are between $2.30 and $2.40 this year [1995]. So, that’s under five times this year’s earnings, but it was a pretty good size multiple back when we bought it.
It’s the future that counts. It’s like what I wrote there, what Wayne Gretzky says, to go where the puck is going to be, not where it is.
So, the current multiple interacts with the reinvestment of capital and the rate at which that capital’s invested, to determine the attractiveness of something now.
And we are affected in that valuation process to a considerable degree by interest rates, but not by whether they’re 7.3, or 7.0, or 7.5. But we’ll be thinking much differently if long-term rates are 11 percent or 5 percent. But we don’t have any magic multiples in mind.
We’re thinking — we want to be in the business that 10 years from now is earning a whole lot more money than it is now, and that we will still feel good about the prospects of the business at that time.