Joel Greenblatt
I find this very useful as a general approach in stock investing.
Excerpt from Joel Greenblatt lecture
A Story Selling Gum
I started in business school 25 years ago. What I know about investing other than reading financial statements, I learned on my own reading and making mistakes. Hopefully, I can give you the benefit of my experience.
A number of years ago, I was trying to explain to my son what I did for a living. He is 11 years old. I spoke about selling gum.
Jason, a boy in my son’s class, sold gum each day at school. He would buy a pack of gum for 25 cents and he would sell sticks of gum for 25 cents each. He sells 4 packs a day, 5 days a week, 36 weeks or about $4,000 a year.
What if Jason offered to sell you half the business today? What would you pay?
My son replied, "Well, he may only sell three packs a day so he would make $3000 a year."
Would you pay $1,500 now? Why would I do that if I have to wait several years for the $1,500?
Would you pay a $1? Yes, of course! But not $1,500. I would pay $450 now to collect $1,500 over the next few years, which would be fair.
"Now, you understand what I do for a living," I told my son.
I sit around trying to figure out what businesses are worth, and then I try to pay a lot less for them. I think you get the point.
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