Author Topic: valuation  (Read 120 times)


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« on: February 17, 2020, 09:19:59 PM »
When we buy a stock, we always think in terms of buying the whole enterprise because it enables us to think as businessmen rather than stock speculators. So let's just take a company that has marvelous prospects, that paying you nothing now where you buy it at a valuation of$500 billion...For example, let's assume that there's only going to be a one- year delay before the business starts paying out to you and you want to get a 10% return. Ifyou paid $500 billion, then $55 billion in cash is the amount that it's going to have to be able to disgorge to you year after year after year. To do that, it has to make perhaps $80 billion, or close to it, pretax. Look around at the universe of businesses in this world and see how many are earning $80 billion pretax - or $70 billion or $60 or $50 or $40 or even $30 billion. You won't find any.
Whether a business sells nails or telecom equipment, if more money is going out than coming in, on a present value basis, it is worthless. As Warren Buffett says, "Value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get."
He continues:
There's plenty of magic in short term in rising PIE multiples and the games people play with accounting and so on. But in the end, you can't get more out ofa business berween now and its extinction than the business makes. And actually you'll make something less depending on who your business managers are, how often there's turnover in the security and how much you pay the investment manager and so on.