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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: armi who wrote (40834)	12/27/2010 8:43:34 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78842

Hmm, I have one minor and two major issues with this. Minor issue. In 3 and C (Note: there is no "A", you counted 1-3 then switched to C...) for how many years you keep multiplying? Is that 10 years like in Buffettology or "remaining life of the company" or what? What about the terminal earnings after that? Depending on the company, this may be a large number. First major issue. You are discounting future cash flows twice. Maybe you don't realize this, but you do it by first subtracting "base earnings" of your 30 year bond and then by doing a threshold discounting. It doesn't make much sense and you get something that is difficult to understand what it means from economic point of view. Second major issue - even more major one. :) I strongly disagree with your steps G and H. The number you get in F is the value of all future cash flows. It makes no economic sense to multiply it by P/E. It's not earnings at one point in time. Look: according to economic theory the value of the security is the sum of all its future cash flows. Assume you have an ice cream machine and you make money selling ice cream. The machine's economic value is all the money you gonna make selling ice cream until it breaks down. So the value of JNJ is what you get in F (actually it's the number of all future cash, not "excess cash", but still). What you do in H makes no economic sense at all. It's like saying: "I am going to make $100 by selling ice cream from ice cream machine until it breaks down. Let me multiply it by 10 and now I will make $1000." No, you won't. And nobody will buy your ice cream machine from you for $1000, because they will never make money back from this purchase price. If you don't believe me, walk through some simple example, like an ice cream machine that makes $10 per year and breaks in 10 years. :) I am not sure where you stepped away from what Buffett (supposedly) does, but I am sure he doesn't do what you described. EDIT: Ah, I see, you are using this: For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education. The issue is, that this gives the intrinsic economic value of the education, but NOT of the individual with the education. In case of company, it gives the intrinsic economic value of the moat of the company, but not of the company itself. There's a huge difference! Obviously, you can do any calculations you want. It's just what you do right now makes no sense.