During his recent Omaha Brunch, Tom Gayner was asked about what discount rate he uses when assessing potential investments. Here’s his response:

Gayner: So first, about interest rates and what do we use as a discount rate when we’re looking at making decisions, economic decisions, whether that’s pricing an insurance policy, whether it’s buying a new business, whether it’s evaluating the securities you either own already or may own.

And I’ll do so by telling the story about my middle daughter, who also went to the University of Virginia. And as a side note, because she was so dutiful a daughter, she thought she would study accounting. And she started out in my footsteps studying accounting.

Not too long into the study of accounting, I got a call from her, and she said, daddy, would it break your heart if I switched over to finance?

And I said, no, honey. You have my full and complete, utter blessing.

So she started down the path of studying finance. And in one of the keystone courses in the finance curriculum in the Modern Academy, you would calculate the weighted average cost of capital and the WACC, which is sort of the discount rate you would use to look at something.

And this was group project, and I can assure you she was never that much of a fan of group projects because she was very diligent and had a free rider problem when it introduced other economic concepts.

But this group project and 36 straight hours of being awake and turning to this paper and answer and whatnot. And the WACC, according to this group project that she did was 10.174%. or something like that.

She handed in the paper and got her grade back, got an A on it. But she then said, Daddy, let me ask you this. When you’re looking at stuff, what do you use as your WACC?

And I said about 10%.

It made her cry. So she had the temerity to approach her professor after that. And she goes up to him and she says, I asked my dad about sort of the WACC and how he does things. And he’s kind of been okay at doing that over his lifetime. That’s what he does.

And when I asked him, he said, about 10%. And the professor looked at her, and I give the guy credit because he said, you know, your dad is right, but we just don’t know how to teach that.

You can watch the entire meeting here:

Markel Omaha Brunch 2023

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