How to Value Companies

We value companies based on our estimate of earnings per share, usually two or three years out. I don’t look six months to a year out because too many other people are doing that, and I don’t look four or five years out because there are too many uncertainties in looking out that far. Then it’s a question of putting a multiple on those projected earnings. Over the past forty years the stock market has sold, on average, at about 15x earnings, so I conclude that an average company is worth 15x earnings. Above average companies, of course, should be worth more than 15x.